Supreme Court Changes the Rules in “Landmark” CERCLA Decision

On May 4, 2009, in a major 8-1 opinion, the United States Supreme Court addressed the scope of “arranger” liability and the basis for apportioning liability under the Comprehensive Environmental Response, Compensation and Liability Act (CERCLA).  In Burlington Northern & Santa Fe Railway Co., et al. v. United States, et al., the Supreme Court found that the liability of a party which “arranges for disposal” of hazardous substances requires a showing of  “intent.”   The Supreme Court also ruled that apportionment of liability under CERCLA is appropriate where the record provides a “reasonable basis” for such apportionment.

Beginning in 1960, Brown & Bryants, Inc. (B&B) operated an agricultural chemical distribution business on property it owned in Arvin, California.  B&B received deliveries hazardous chemicals which it then stored and distributed to customers.  In 1975, B&B expanded its operations and leased an adjacent one acre parcel which was owned jointly by several railroad companies, now defendants Burlington Northern and Santa Fe Railroad (“the Railroads”). 

Defendant Shell Oil sold a herbicide and two pesticides, including one known as D-D, to B&B.  D-D was first sold and delivered to B&B in 55 gallons drums, but Shell later required B&B to purchase and store D-D in bulk.  D-D was delivered by common carrier, and B&B assumed “stewardship” over the chemicals as soon as the tanker trucks arrived at the Arvin facility.   Spills of D-D occurred during the transfer from the tanker trucks to B&B’s bulk storage tanks.  In the 1970s, Shell -- aware that spills of D-D were commonplace -- encouraged its distributors, including B&B, to make certain improvements to ensure the safe handling of this product and to reduce the likelihood of spills during delivery.

During B&B’s 28 years of operations, D-D and the other pesticide and herbicides contaminated the soil and groundwater at the Arvin facility as a result of spills, equipment failures and tank and truck rinsing activities. In 1983, the California Department of Toxic Substances Control (DTSC) and the United State Environmental Protection Agency (EPA) investigated the site and found significant contamination including a plume of contaminated groundwater that threatened to leach into an adjacent supply of potential drinking water.  By 1989, B&B was insolvent and ceased operations and EPA listed the Arvin site on its National Priorities List.  EPA and DTSC ultimately cleaned up the site, incurring more than $8 million in response costs.  In 1996, they commenced this action under CERCLA against the Shell and the Railroads alleging that they were Potentially Responsible Parties (PRPs) which were jointly and severally liable for all of the cleanup costs incurred by the EPA and DTSC. 

After a 6 week bench trial, the US Eastern District Court of California held that Shell and the Railroads were PRPs.  Shell was found liable as a person which “arranged for” the disposal of hazardous substances due to its sale and delivery of D-D to the Arvin site.  The Railroads were found liable due to their ownership of a portion of this CERCLA site.  Though liability under CERCLA is joint and several, the District Court found that the harm was “divisible” and could be apportioned.  With respect to the Railroads, the District Court used three figures (i.e., the % of the total property owned, the duration of B&Bs lease of the properties and the amount and type of chemicals spilled on the Railroads’ land) to find them liable for 9% of the cleanup costs.  Shell was found 6% liable, based on an estimation of the spills of Shell’s product.  EPA and DTSC appealed and Shell cross-appealed.

The Ninth Circuit Court of Appeals ruled that Shell was liable as an “arranger” even though Shell had not actually contracted with B&B to dispose of a hazardous waste product and had only supplied a new and useful product to B&B.  The Court of Appeals  found that Shell fell within the “broader category” of arrangers because the disposal of hazardous waste was a “foreseeable byproduct” of its sale of D-D to B&B, particularly in light of the fact that Shell knew of spills and tried to encourage better product transfer safety procedures.   As to apportionment, the Court of Appeals disagreed with the District Court’s finding that there was a reasonable basis for apportionment and decided that both Shell and the Railroads were jointly and severally liable for the cleanup costs. The Supreme Court granted certiorari on the questions of Shell’s liability as an arranger and whether the liability could be apportioned. 

The Supreme Court first addressed the question of whether the Railroads and Shell were PRPs under CERCLA.  The Supreme Court found that the Railroads qualified as PRPs pursuant to CERCLA §§107(a)(1) and (2), as owners and operators of a “facility” at which hazardous substance were disposed of.  The Supreme Court then looked at whether Shell could be an arranger under CERCLA §107(a)(3), which states that liability attaches to an entity which “arranges for the disposal…of hazardous substances.”

Giving the term “arrange” its ordinary meaning, the Supreme Court stated that “under the plain language of the statute, an entity may qualify as an arranger under [§107(a)(3)] when it takes intentional steps to dispose of a hazardous substance.”  The Supreme Court noted that it would be an error not to recognize the role that “state of mind” plays in determining whether a party arranged for disposal.  Addressing the argument of EPA and DTSC that Shell’s continued supply of D-D to B&B -- despite its knowledge that spills and leaks would result -- the Supreme Court found that “knowledge alone” that a product would spill or leak was insufficient to find that a party “planned for” the disposal, “particularly when the disposal occurs as a peripheral result of the legitimate sale of an unused, useful product.”   In order to find Shell liable as an arranger, the Supreme Court opined that Shell would have had to have “entered into the sale of D-D with the intention that at least a portion of the product be disposed of during the transfer process….”   Given that the facts (including Shell’s efforts to encourage distributors to reduce the likelihood of spills) found by District Court didn’t support such a conclusion, the Supreme Court held that Shell was not liable as an arranger under CERCLA.

The Supreme Court next looked at the question of whether the Railroads should be jointly and severally liable for the full cost of the clean up and, if not, whether the District Court’s method of apportioning of liability was appropriate.  After examining the concepts of joint and several liability and divisibility of harm under CERCLA, the Supreme Court opined that “apportionment is proper when ‘there is a reasonable basis for determining the contribution of each cause to a single harm’.”  The Supreme Court affirmed that the burden of showing that such a reasonable basis exists lies with the defendant seeking to avoid joint and several liability.  The Supreme Court, noting that both the District Court and the Court of Appeals agreed that the harm was “theoretically capable of apportionment,” examined whether the record provided the District Court with a reasonable basis to conclude that the Railroad was 9% liable.  After a careful review of the District Court’s method of arriving at the three figures which it used to determine the Railroads’ apportioned share, the Supreme Court concluded that the “facts contained in the record reasonably supported the appointment of liability” decided by the District Court.

The full impact of the Burlington Northern decision will likely be played out in the lower courts for some time to come.  The question of whether an arranger actually “intended” to dispose of hazardous substances will surely be the subject of future litigation.  In addition, while the Supreme Court went to great lengths to uphold the District Court’s basis and method of apportioning liability, it seems clear that the courts will still have to grapple with what exactly is a “reasonable basis” for apportionment.  The CERCLA landscape has definitely changed.  The challenge for practitioners and PRPs alike will be figuring out what this new landscape actually looks like.