By Andrew H. Perellis and Patrick D. Joyce

The Ninth Circuit Court of Appeals recently held that a district court must provide deeper scrutiny to Comprehensive Environmental Response, Compensation and Liability Act (CERCLA), 42 U.S.C. §9601 et seq. (1980), consent decrees.

The August 1, 2014 decision in State of Arizona v. Ashton Company Inc. Contractors and Engineers, et al., No. 12-15691 (9th Cir. August 1, 2014) changes what had previously been a virtual rubber stamp of approval into a significant hurdle to speedy CERCLA settlements.  The case addressed liability of several potentially responsible parties (PRPs) under CERCLA and the Arizona Water Quality Assurance Revolving Funds (WQARF). The State of Arizona was seeking recovery of cleanup costs resulting from the contamination of the Broadway-Patano Landfill Site, a hazardous waste site in Tucson, Arizona.

After an investigation that ended in 2009, the State sent settlement offers to those PRPs who had requested early settlement and were also de minimis parties.  The proposed settlement agreements required each settling party to pay a specified amount in exchange for a release of liability under CERCLA and WQARF.

The State initiated the lawsuit to receive judicial approval of the proposed settlement agreements.  However, several non-settling PRPs moved to intervene in the case, objecting to the proposed settlement agreements.  The intervenors argued the State had not provided enough information to the district court to allow the court to make an decision on whether the proposed settlement agreements were fair and reasonable and consistent with CERCLA’s objectives.

The district court approved the proposed settlement agreements, deferring to the Arizona Department of Environmental Quality’s (ADEQ) judgment that “the public interest is best served through entry of th[e] agreement[s].” State of Arizona v. Ashton Company Inc. Contractors and Engineers, et al., No. 10-634 (D. Az. February 21, 2012). The Ninth Circuit Court of Appeals partially reversed the district court’s decision, saying the court had failed to independently scrutinize the terms of the settlements, as required under CERCLA.

Traditionally, early consent decrees have been used as a way to remove de minimis parties from litigation so the court can focus on determining liability for those PRPs who were more involved at a site.  Making a liability determination is not typically a speedy process, as liability is not based solely on the mass or volume of waste provided.  Rather, more complex factors are often taken into consideration including: concentration of hazardous substances contributed, type of hazardous materials contributed, knowledge of effects on the environment, and whether disposal was done in good faith.

In reversing the district court, the Ninth Circuit found the district judge had given too much deference to ADEQ’s assurances that the settlements were fair and reasonable.  Further, the Ninth Circuit criticized the district court for not even discussing the amount each settling PRP would pay.  Rather, the district court merely found the settling PRPs were de minimis because ADEQ calculated their liability to be between 0.1% and 0.2% of the total $75 million cost.  The Ninth Circuit found that a state agency such as ADEQ (unlike U.S. EPA) was not entitled to deference concerning its interpretation of CERCLA, a federal statute, and the district court “may not abdicate its responsibility to independently determine that the agreements are fair, reasonable, and consistent with CERCLA’s objectives.”

After Arizona v. Ashton, to satisfy the Ninth Circuit’s mandate for deeper scrutiny of settlement agreements, the settling parties will now have to provide a suitable record showing that the allocation underlying the settlement is appropriate.  Requiring increased judicial scrutiny of CERCLA settlements is particularly appropriate in light of CERCLA’s provision giving contribution protection to settling parties.  A non-settlor who ultimately pays more than its fair-share of liability has no recourse against parties that have settled and enjoy contribution protection.  As such, judicial scrutiny of whether a settlement is appropriate mitigates against early settlors getting a ‘sweetheart deal.”