Supreme Court Set to Review Joint and Several Liability and Arranger Liability Standards

The United States Supreme Court will hear oral argument next Tuesday (February 24) in the consolidated cases of Burlington Northern & Santa Fe Railway Co. v. United States[1] and Shell Oil Co. v. United States (collectively, BNSF).[2] The case presents two significant questions: first, whether liability under CERCLA is joint and several or can be apportioned based on factors such as percentage of ownership or the amount of hazardous substances found on different portions of contaminated property, and, second, whether a party that sells a product but does not participate in its use or disposal can be held liable as an “arranger.”

For years, Potentially Responsible Parties (PRPs) have viewed joint and several liability as an unfair but unchangeable reality, exposing them to the entire cost of a Superfund cleanup, irrespective of how tenuous their connection to a site. Both the federal and state governments have argued that, because liability under CERCLA is joint and several, they can name fewer than all PRPs and compel any of them to clean up an entire Superfund site, subject to the PRPs’ ability to pursue cost recovery or contribution actions against other liable parties.

Because many Superfund sites have long histories of contamination, they often involve companies that are either insolvent or defunct. In such cases, EPA and the states have sought to compel the PRPs that are still solvent to pick up the “orphan share.” Most district and circuit courts have agreed with the governments’ position, and most liable parties and their lawyers have come to accept it as an immutable, if unfair, truth.

Yet, as the petitioners have emphasized in their briefs to the Supreme Court, the CERCLA statute does not state that liability is joint and several and that question was left by Congress to the courts. Now, in a case with particularly sympathetic facts for the PRPs, the Court will address the issue of whether the government can force PRPs to pay more than their equitable share of cleanup costs where a reasonable basis exists for allocation among PRPs.

The question of “arranger” liability is also important to industry groups, as shown by the fact that four of the nine amicus briefs are directed solely to the arranger question.[3] Courts have more and more frequently found liability even where the link between the “arranger” and the actual disposal of hazardous substances has grown increasingly attenuated. In the case of Shell, liability was imposed on a chemical manufacturer whose only nexus to the contamination was minor spills of chemicals during delivery of a saleable product.

Factual Background

The BNSF case arose out of a fairly common fact pattern for CERCLA cases. A small chemical distributor in California, Brown & Bryant, Inc. (B&B), owned and operated a facility that repackaged agricultural chemicals. Its operations were located on a 4.7-acre parcel, of which about a 0.9-acre piece was leased from predecessors to BNSF and the Union Pacific Railroad (collectively, the Railroads). The Railroads played no role in B&B’s operations and all parties agreed that the only basis for imposing liability on them was their status as “owners” under 42 U.S.C. § 9607(a).

Shell Oil sold a soil fumigant to B&B which was used to kill microscopic worms that attack root crops. The chemical was shipped via commercial carrier FOB destination, meaning that the buyer was responsible for the product once it arrived at the facility.[4] In deciding the case, the district court found that minor spills took place upon the delivery of the chemical, though much larger releases resulted when B&B washed out its equipment.

In 1988, California’s Department of Toxics Substances Control ordered B&B to take remedial action to address soil and groundwater contamination on the site. Soon thereafter, B&B went out of business, and EPA listed the site on the national priority list in 1989. The Railroads and Shell were named PRPs and ordered to clean up the entire site even though the Railroads owned only a small portion of it, and the portion that they owned did not require remediation. In 1996, the United States and the State of California filed a cost recovery action against the Railroads and Shell, seeking to recover over $8 million in response costs.

District Court Opinion

After a lengthy bench trail, the district court held in a 185-page opinion that both the Railroads were liable as owners and Shell was liable for “arranging” for the disposal of hazardous substances. However, when it came to the issue of damages, the court determined that liability could be apportioned among Shell, the Railroads and the defunct operator, B&B. While it agreed with the governments that the defendants’ burden to show an appropriate basis for apportionment “is heavy,” and that “[t]he evidence supporting divisibility must be concrete and specific,”[5] the district court concluded that defendants had met that burden. Even more significantly, it declined to apportion the “orphan share” to the PRPs, leaving it instead as an unrecovered cost for the government plaintiffs to absorb.

The district court used a formula to apportion costs to the Railroad that combined years of ownership with the percentage of property they owned. Specifically, the court multiplied the percentage of ownership, percentage of time owned in relation to total operations, and the fraction of hazardous products attributable to the Railroads’ parcel to determine that the Railroads were liable for 9% of the total cleanup costs. For Shell, the district court estimated the amount of material resulting from leaks that occurred during product delivery, and then compared that with the total amount of chemicals spilled. Based on various assumptions, it determined that Shell was liable for 6% of the total cleanup costs.[6] The district court’s allocation resulted in 85% of the governments’ costs going unreimbursed, even while the court acknowledged that “authority exists to reallocate B&B’s orphan share to the other responsible persons according to Section 113(f) of CERCLA.”[7] Despite that authority, the district court held that “to do so would be manifestly inequitable.”[8]

Ninth Circuit Opinion

Reviewing district court’s decision, the Ninth Circuit began by affirming, at least in concept, the validity of the divisibility doctrine, acknowledging that “apportionment is available at the liability stage in CERCLA cases.”[9] Nevertheless, the Ninth Circuit held that, in this case, the evidence was not “sufficiently clear” to justify apportionment.[10] It found the district court’s approach too simplistic, and at one point referred to apportionment based on the percentage of land owned as a “meat axe approach.”[11]

The Ninth Circuit found that the factors the district court used (percentages of land area, time of ownership and types of hazardous products) bore an insufficient connection to the pertinent question, namely, what part of the contaminants found on the land were attributable to the percentage of toxic substances or to the activities on the Railroads’ parcel. The Ninth Circuit rejected the district court’s apportionment calculations, and held that the Railroads had failed to prove a “reasonable basis” for apportioning liability.[12]

Turning to Shell, the Ninth Circuit found that, because the appropriate consideration for apportionment is contamination, by presenting evidence of leakage, Shell had failed to prove whether its chemicals had contaminated the soil in any specific proportion, when compared with other chemicals spilled at the site. Similar to its conclusion with respect to the Railroads, the Ninth Circuit held that Shell’s evidence of leakage was insufficient to provide a “reasonable basis” for apportionment.[13]

Shell had argued that the district court used the wrong standard for determining whether it was an “arranger,” and that the “useful product” doctrine precluded imposition of arranger liability based on the fact that Shell lacked ownership and control over the chemicals at the time of the transfer. The Ninth Circuit rejected these arguments, finding that an entity can be an “arranger” even if it did not intend to dispose of the product, because, under CERCLA, “disposed” can mean “spilled.”[14] The court also rejected Shell’s “useful product” defense, holding that the “useful product” doctrine did not apply where the sale of the product immediately results in the leakage of hazardous substances, and that Shell had sufficient control and knowledge of the transfer process to be considered an “arranger” under CERCLA.[15]

The Parties’ Positions on Joint and Several Liability, Apportionment and Arranger Liability

Apportionment

In its briefing, BNSF pointed to the fact that “Congress twice rejected proposals for mandatory joint and several liability under CERCLA, and intended for courts to determine the scope of liability on a ‘case by case basis’ in light of ‘traditional and evolving principles of [the common law.’”[16] Arguing from this premise, BNSF relied on the evolution of the common law as exemplified in the Second and Third Restatement, maintaining that a party “need only present evidence showing a ‘reasonable’ and ‘rational’ basis for a ‘rough estimate’” of apportioned liability.[17] BNSF cited cases, including CERCLA cases, where courts have apportioned liability based on factors such as geography,[18] time,[19] different contaminants at a site,[20] as well as the fact that the district court provided a safety margin to protect against over allocation.[21] BNSF contended that “[b]y refusing apportionment … the Ninth Circuit effectively held the Railroads strictly liable as landowners for the consequences of disposals of hazardous materials on land they did not own.”[22]

The United States countered by arguing that the lower courts have interpreted liability under CERCLA in a manner consistent with the Restatement, imposing joint and several liability “unless the defendant establishes a reasonable basis for apportioning harm.”[23] The United States relied on CERCLA’s contribution provisions to allow other responsible parties to seek recovery for costs that are paid over and above a parties’ fair share, a position that is “consistent with the common law and permits courts fairly to divide response costs among responsible parties.”[24]

Based on what the Ninth Circuit characterized as a strategic choice to pursue a “scorched earth’ all-or-nothing approach to liability,” the United States claimed that the evidence in the record would not support apportionment, because “neither the Railroads nor Shell provided any evidentiary basis for apportionment.”[25] According to the government, the district court’s approach conflated the equitable task normally reserved for contribution with apportionment under section 107, a disposition that the both the United States and the State of California maintained was inappropriate.[26]

Arranger Liability

In arguing against the imposition of arranger liability, Shell pointed to the fact that had it sold a commercial product, transported by common carrier, to a customer who had assumed ownership, possession and control prior to any spillage. Shell maintained that there was no showing of intent to make plans for or preparations for disposal of hazardous waste.[27] Without a showing of intent, Shell maintained that the Ninth Circuit’s view of arranger liability was counter to the meaning of “arranged for” disposal.

Shell also argued that CERCLA’s definition of “disposal” involved discarding hazardous “waste,” which precluded an extension of liability for the sale of a useful product designed for ongoing use. Finally, Shell pointed to the terms “ownership” and “possession” in section 107(a)(3), arguing that the fact that B&B assumed full ownership and possession precluded Shell from being found liable as an arranger: “The court of appeals wrongly imposed liability even though Shell had no control over, or involvement in, the transfer process, and the waste was generated as a result of the purchaser’s operations.”[28]

The United States’ rebuttal to Shell’s position emphasized the fact that “Shell knew that its contract to supply B&B with agricultural chemicals directly and routinely resulted in spills and leaks that expressly qualify as disposals of hazardous substances covered by CERCLA.”[29] The government argued that CERCLA’s definition of “arranger” liability encompasses activities even where disposal is not the purposes of the transaction and which are “not limited to transactions involving intentional disposals.”[30]

The United States also argued against any interpretation of CERCLA that limited arranger liability solely to instances where the defendant retains ownership of the hazardous substances at the time of disposal, emphasizing that the statute encompasses a person who “by contract, agreement, or otherwise” arrangers for some “other party or entity” to dispose of the hazardous substances.[31] The government’s position was that the operative time to decide whether one was an arranger was “at the time the arrangement is made.”[32]

For more information, contact Steven Jones or a member of our Environmental Litigation practice group.