Law360 - February 27, 2015

Since the U.S. Supreme Court issued its landmark decision in Burlington Northern & Santa Fe Railway Co. v. United States, 556 U.S. 599 (2009), holding that a party must “take intentional steps to dispose of a hazardous substance” to qualify as an “arranger” under § 107(a)(3) of the Comprehensive Environmental Response, Compensation and Liability Act, 42 U.S.C. § 9607(a)(3), several federal circuit courts have addressed the requisite intent that is necessary to establish a claim for “arranger liability.” In the coming months (if not weeks), the Fourth Circuit will become the latest federal appellate court to enter the fray and address the issue of intent under § 107(a)(3) when it renders a decision in Consolidation Coal Co. v. Georgia Power Co., No. 13-1603 (4th Cir.). Identifying and understanding the key takeaways from these cases will help businesses that sell new or used products containing hazardous substances assess, and most importantly minimize, their risk of liability as arrangers.

Section 107(a) of CERCLA imposes liability for the response and cost of cleaning up environmental contamination by hazardous substances on four classes of potentially responsible parties, including those who “arranged for disposal” of hazardous substances. The Supreme Court provided needed clarification as to the meaning of “arranger” in Burlington Northern. In short, the high court held that a party must intend to dispose of a hazardous substance to qualify as an arranger. This decision is widely viewed as significantly narrowing the scope of arranger liability.

In Burlington Northern, an oil company and other entities sold pesticides and chemicals to Brown & Bryant Inc., which operated a facility for the storage and distribution of agricultural chemicals. Leaks and spills often occurred at the facility when common carriers delivered chemicals and during the process of transferring the chemicals between trucks and tanks onsite for storage and when distributed to B&B’s customers. The oil company had actual knowledge of leaks and spills. Notably, the oil company attempted, albeit unsuccessfully, to reduce the number of releases by providing its distributors with safety manuals, requiring the distributors to maintain adequate storage facilities and offering discounts to distributors who implemented improvements at their facilities. Based on the oil company’s knowledge of releases, the government argued that the company was an “arranger” under CERCLA and should be responsible for a portion of the costs to remediate contamination at the site.

The court held that the oil company did not constitute an arranger because, despite the company’s knowledge of releases, it did not enter into the sale of chemicals to B&B “with the intention that at least a portion of the product be disposed of during the transfer process.” The court reasoned that “an entity may qualify as an arranger under § 9607(a)(3) when it takes intentional steps to dispose of a hazardous substance.” The court added that “[w]hile it is true that in some instances an entity’s knowledge that its product will be leaked, spilled, dumped, or otherwise discarded may provide evidence of the entity’s intent to dispose of its hazardous wastes, knowledge alone is insufficient to prove that an entity ‘planned for’ the disposal, particularly when the disposal occurs as a peripheral result of the legitimate sale of an unused, useful product.” Because the oil company took steps to reduce the occurrence of leaks and spills, the oil company’s mere knowledge that releases continued, without more, was insufficient to show that the company specifically intended to dispose of chemicals.

The court provided additional guidance on the type of evidence that could satisfy the intent element for purposes of arranger liability. Specifically, the court stated that “CERCLA liability would attach under § 9607(a)(3) if an entity were to enter into a transaction for the sole purpose of discarding a used and no longer useful hazardous substance,” but “an entity could not be held liable as an arranger merely for selling a new and useful product if the purchaser of that product later, and unbeknownst to the seller, disposed of the product in a way that led to contamination.” The court acknowledged the existence of a gray area between these two extremes where “the seller has some knowledge of the buyers’ planned disposal or whose motives for the ‘sale’ of a hazardous substance are less than clear.” Those instances require courts to “look[] beyond the parties’ characterization of the transaction as a ‘disposal’ or a ‘sale.’”

The federal circuit courts that have addressed transactions falling in the “gray area” since Burlington Northern — namely, the First, Second, Third, Fifth, Seventh and Ninth Circuits — have reaffirmed that the mens rea for arranger liability under CERCLA is difficult to define precisely and requires a fact-intensive analysis. To assist businesses who may be uncertain or confused about their potential exposure and risk of liability as arrangers, this article outlines the key takeaways from the post-Burlington Northern circuit cases and provides guidance for minimizing potential arranger liability.

Key Takeaways from the Circuits

Circuit courts have identified at least four principal factors for determining the existence or absence of intent for purposes of arranger liability under CERCLA. These factors should be considered by businesses evaluating their potential liability from transactions involving hazardous substances or products containing such substances or acquisitions of companies that have handled such materials.

1. Does the Product Have a Useful Purpose?

The seller of a finished, useful product containing a hazardous substance — whether the product is brand new or refurbished — may be shielded from arranger liability for contamination resulting from the transport or use of that product. The following is a list of factors that are relevant to evaluating the usefulness of a product:
 

(a) the product serves a productive purpose;
(b) the existence of a viable, competitive market for the product;
(c) the value of the product to the purchaser (e.g., it can be resold for profit);
(d) the value of the product to the seller (e.g., it is sold for more than token amounts);
(e) the product is not obsolete;
(f) the product has not reached the end of its useful life (it is not merely scrap and can be reused);
(g) the product has resale value (and more than nominal resale value); and
(h) the product was in good condition when it was sold (i.e., not leaking or spilling).

In contrast, the seller of nonuseful products or hazardous substances is more likely to be liable as an arranger because it is effectively getting rid of waste and delegating the responsibility for disposing of it to another party. This is so even if that party is willing to pay for the item.

2. Is the Sale Transaction Legitimate?

The circumstances surrounding the sale of a product containing hazardous substances may evince the intent to dispose of waste through an otherwise bona fide, legitimate transaction in which a purchaser is willing to buy the product. In other words, what was the purpose of the transaction? The underlying motive of a seller in a transaction is critical to answering that question. If a seller’s primary goal is to get rid of something useless, even if it had value to the purchaser, then a court is more likely to find arranger liability. But if the seller’s motive is to sell a useful product with a productive purpose and a well-established market, even if that product contains a hazardous substance that could be discarded by the purchaser, then arranger liability is less likely.

3. What is the Seller’s Knowledge of the Disposal?

A seller’s knowledge that a hazardous substance is or may be released at the purchaser’s property, alone, does not establish the required intent for arranger liability. Knowledge of spills, however, can provide some evidence of intent and must be weighed along with other relevant considerations.

4. Who Owns, Possesses or Controls the Product?

Ownership or possession of a product containing hazardous substances at the time of disposal is relevant to the determination of arranger liability. Similarly, the extent of a party’s control over the product when it is disposed is instructive. A party who does not own, possess or have authority to control the product during disposal is less likely to be liable as an arranger.

How to Minimize the Risk of Arranger Liability

Guided by the above considerations identified by circuit courts, businesses may take a variety of precautions to reduce exposure to arranger liability under CERCLA. This is a nonexhaustive list of ways that a business can prevent arranger liability:

1. Perform a careful, thorough due diligence review before acquiring another company. Make sure you are aware of all historical practices and properties that may have involved the storage, use or disposal of hazardous substances.
2. Select only reputable distributors and contractors to transport hazardous substances. Know your vendors. Do not use the same vendors for sales as disposals.
3. Provide customers and distributors with detailed product safety manuals and instructions regarding the safe handling, storage and use of the product.
4. Require distributors to maintain safe and adequate storage facilities.
5. Request periodic access to distributors’ storage facilities to conduct inspections.
6. Require distributors and contractors to acknowledge and agree that they are aware of the risks of handling, storage and using the product.
7. Require distributors and contractors to agree to fully comply with all applicable laws regarding storage, handling and use of hazardous substances.
8. Specify in agreements with customers that the purpose of the transaction is the sale of a product and not disposal. Likewise, if you are not engaging in a transaction intending for the disposal of hazard substances, do not include language that could be interpreted as supporting such intent.
9. Treat sales and disposals differently within your business. Create different internal procedures and processes for each.
10. Require customers and distributors to indemnify, defend and hold you harmless from claims relating to disposal of hazardous substances.
11. If you are aware of leaks or spills of hazardous substances by distributors or customers, take steps to minimize the possibility of future releases by those entities. Affirmatively prevent spills.
12. Do not accept or assume authority to control hazardous substances after you sell them to customers.
13. If you are selling a used product, adequately prepare the item for sale by removing any hazardous substances and ensure hazardous substances cannot be released from the product during transport or storage.
14. Treat used, but useful products containing hazardous substances as assets on your balance sheet.
15. If you hire a contractor to dispose of hazardous substances, avoid involvement in transporting or storing the substances.

Conclusion

While there is no bright-line rule for determining the existence or absence of intent for purposes of arranger liability under CERCLA, the factors identified by circuit courts and the suggestions listed in this article should serve as useful guideposts to businesses seeking to reduce their exposure to arranger liability.

“Scanning The Post-Burlington Northern CERCLA Landscape,” by John J. DiChello, Jr. appeared in the February 27, 2015 edition of Law360. To learn more, please click here or visit www.law360.com. Reprinted with permission from Law360.