The Ninth Circuit has further defined the level of scrutiny required by a court when evaluating settlements under the Comprehensive Environmental Response, Compensation and Liability Act (CERCLA). In State of Arizona v. City of Tucson, the Ninth Circuit refused to defer to the settling state agency and required the lower court to independently scrutinize the settlement terms.

This decision will clearly impact the level of scrutiny required by a court when a state proposes to settle both state and federal cleanup liability at a site. What isn’t clear is whether this decision will impact the level of scrutiny required for all settlements and/or settlements by a state agency under the laws of its state.

Background

The State of Arizona sought judicial approval of proposed settlements with a number of responsible parties. The settlements resolved the settling parties’ liability under CERCLA and Arizona environmental law. The District Court approved the settlements and recognized its obligation to independently scrutinize the settlement terms. However, the District Court opinion did not include any substantive analysis of the settlements’ terms.

The Ninth Circuit stated that it is not enough if evidence sufficient to evaluate the settlement terms is before the court. The lower court must “actually engage with that information” and explain why the evidence indicates the settlement is substantively “fair, reasonable, and consistent with CERCLA’s objectives.” The district court must evaluate the specific settlement amounts relative to each party’s liability and consider other factors, such as litigation risk, when determining if the settlement payments are appropriate under the circumstances.

Greater Deference to the EPA than State Agencies

The Ninth Circuit acknowledged that EPA would be given a greater level of deference in any settlement under CERCLA, but it would not provide the same level of deference to the state agency. The court expressly declined to apply the “abuse of discretion” standard, apparently because the state was settling with defendants pursuant to a statute the state was not “charged with enforcing.” The Ninth Circuit seemed to be willing to allow state agencies “some deference” with regard to settlements under their state laws, but it did not say it would allow the agencies the same level of deference provided to EPA under CERCLA.