Stipulated Penalties and Dispute Resolution in CERCLA Consent Decrees: Practical Innovations Can Benefit Everyone

Kevin Gaynor

Mr. Gaynor is a partner in the Washington, D.C., office of Venable, Baetjer, Howard & Civiletti. Until December 1987, he was Assistant Section Chief of the Environmental Enforcement Section in the Department of Justice Lands and Natural Resources Division. He thanks Stephen Ramsey of Sidley & Austin, Washington, D.C., and Brigid Kenney of the Baltimore office of Venable, Baetjer & Howard for their thoughtful comments on the article.

[18 ELR 10155]

The Environmental Protection Agency (EPA) has a statutory obligation to begin 175 Comprehensive Environmental Response, Compensation, and Liability Act (CERCLA) cleanups by October 1989, and 200 more CERCLA cleanups by October 1991.¹ If EPA is to meet these deadlines, it must negotiate on a truly massive scale with potentially responsible parties (PRPs), to ensure private cleanups at many sites.² Even so, EPA has generally insisted on provisions in CERCLA consent decrees calling for draconian stipulated penalties and one-sided dispute resolution procedures. This insistence by EPA has chilled the desire of PRPs to enter into negotiated settlements. Recently, however, EPA has incorporated better-reasoned provisions into the consent decree entered for the Bayou Sorrel site in Louisiana,³ and if EPA is willing to adopt a similar posture in other sites around the country, the rate of private cleanup could be measurably improved.

Background

Stipulated penalty provisions are routinely included in EPA consent decrees, regardless of the media, because EPA believes that they encourage the defendant to comply with the terms of the decree in a timely fashion.⁴ The 1986 CERCLA amendments codified this approach for remedial actions at hazardous waste sites. CERCLA § 121(e)(2) now provides that "[e]ach consent decree shall also contain stipulated penalties for violations of the decree in an amount not to exceed $25,000 per day…."⁵ CERCLA does not, however, require that stipulated penalties attach to each individual item to be delivered or performed under the consent decree. CERCLA does not mandate the amounts of the penalties where they are less than the statutory maximum, or define those conditions triggering the running of stipulated penalties. These important details are left to EPA.

CERCLA now also provides penalties even broader than these stipulated penalties to ensure defendants' compliance with consent decree requirements. Under § 122(l),⁶ a party failing to comply with any term or condition of a consent decree faces CERCLA's full panoply of civil penalties: EPA may order or seek a U.S. District Court to assess penalties as high as $75,000 a day for violations of the consent decree.⁷

The Defendants' Perception: Why Enter Into Consent Decrees?

The EPA penalty authority in §§ 121(e)(2) and 122(l) frightens the PRP community. Fear turns to terror when these authorities are read in conjunction with the standard of review applied to dispute resolution. Under § 113(j), a reviewing court will uphold EPA's choice of response action unless the objecting party can demonstrate that EPA is being arbitrary and capricious.⁸ This standard turns dispute resolution into a "government almost always wins" provision.

New EPA Guidance, issued in September 1987,⁹ provides no solace to PRPs. In it, EPA insists that stipulated penalties (and presumably penalties under § 122(l)) accrue during dispute resolution. This approach is consistent with EPA's historic position that "a polluter seeks judicial review on its own time,"¹⁰ and effectively renders dispute [18 ELR 10156] resolution a meaningless clause. Indeed, this may very well be EPA's intent.¹¹

Under the scheme created by the September 1987 EPA Guidance, a defendant would be foolhardy to invoke dispute resolution. In light of the standard of review, a party would incur its own legal fees and many thousands of dollars in stipulated penalties before a court rendered its almost certainly negative decision.

Yet cleanup of a hazardous waste site is an inexact science. Until the bulldozers are on site and work commences, the remedial crew cannot be confident as to precisely what problems they will encounter no matter how thorough the remedial investigation and feasibility study. Technical problems and disputes as to their resolution will invariably arise. Given the stacked deck of accruing stipulated penalties and probable defeat in court, the PRP who has agreed to cleanup is at EPA's mercy.

This is not an enviable position for a PRP and not conducive to encouraging PRPs to do cleanups. PRPs volunteering to perform the cleanup are placed at a disadvantage compared to PRPs who sit back and let the government or other PRPs do the work. The nonparticipating PRPs are not faced with the drain on company time from participating in the cleanup, and will not have to pay a share of stipulated penalties accrued in the course of the cleanup. If they are ultimately sued by the government or the settling PRPs, they pay a discrete share of the cleanup costs and avoid the problems of actually cleaning up the site.

The September 1987 EPA Guidance states that stipulated penalties are an effective enforcement tool for encouraging compliance with a consent decree.¹² It says that the level of the penalties is to be geared to "exceed the amount of estimated savings due to delay,"¹³ but the Guidance does not acknowledge that in many instances delay increases the economic burden that the PRP is bearing since it often results in remedial costs increasing, not decreasing.

PRPs Have a Choice Not to Enter Consent Decrees

Unlike the plant manager who may have to comply with environmental requirements or face being shut down, the PRP has a choice: do the cleanup or let EPA do it and reimburse EPA. In making that choice, once again in contrast to the plant manager, the PRP faces uncertain technological problems: each hazardous waste site is unique; the PRP has limited information on the site since it was usually an old and poorly operated facility which the PRP did not operate; and the site may be located many miles from the PRP, creating logistical and control problems. If EPA seeks to encourage PRP cleanups, it must acknowledge that PRPs are different than the ordinary polluter, and structure its stipulated penalty policy accordingly.

EPA wants to avoid actually going through the dispute resolution process and force the timely implementation of consent decrees, for the laudable goals of speeding cleanup of a site and minimizing the expenditure of EPA resources. EPA is concerned that dispute resolution proceedings would tie up agency personnel in court and could disrupt the work schedule of the cleanup.

The Agency's approach, however, may be counterproductive. If it discourages PRPs agreeing to consent decrees in the first place, the overall program will be cleaning up fewer sites nationwide while expending more Agency resources. It would be far better for EPA to give the PRPs opportunities to have the many inevitable technical problems in implementing a remedy heard above the lower level EPA technical person who is responsible for direct oversight. Guaranteed appeals to a senior EPA official in the regional office, such as the waste management director or the deputy regional administrator, or nonbinding arbitration before an outside arbitrator, would provide a less formal and probably less time-consuming forum for resolving technical disputes. This could meet, at least in part, EPA concerns of delay and the drain on resources of a formal court proceeding, yet would provide an outlet for the PRPs to have their technical concerns heard.¹⁴ This would assure PRPs that costly technical decisions would not be left to lower level EPA staff.

the Bayou Sorrel Consent Decree: Movement in the Right Direction

The Bayou Sorrel consent decree structures the stipulated penalty provision to meet some PRP concerns, while still providing strong incentives for the PRPs to meet their deadlines.¹⁵ The stipulated penalty provision provides for three tiers of violation, covering reports, deadlines for remedial work, and performance of the remedial work in accordance with the statement of work, respectively. The amounts for the penalties escalate within tiers, with the first tier containing the lowest ($500 per day up to 14th day; $1,000 per day up to 44th day; and $2,000 per day after 44th day) and the third tier containing the highest ($2,000 per day up to 14th day; $5,000 per day up to 44th day; and $10,000 per day after 44th day). Penalties for the third tier are not triggered until EPA or the state gives the PRPs notice that remedial work was improperly performed and the PRPs have a reasonable opportunity to cure. This provision meets PRP concerns that a construction defect would be discovered several months after the work was finished and the PRPs would retroactively be subject to stipulated penalties from the date that the mistake occurred.

The difference in tiers reflects a difference in seriousness of the individual items to be performed or delivered. The amounts are well below the $25,000 ceiling in the statute because EPA retains its right to seek additional relief under § 122(l).

The most novel part of the stipulated penalty provision provides the PRPs an opportunity to petition the court for forgiveness of up to 50 percent of any stipulated penalties that accrue during dispute resolution if they can demonstrate that their position, although unsuccessful, was nonetheless "substantially justified."¹⁶ The term "substantially [18 ELR 10157] justified" is the standard that the United States must meet to avoid paying attorneys fees under the Equal Access to Justice Act,¹⁷ where the government loses on the merits. "Substantially justified" means more than merely "reasonable"; it seems to mean something more like "clearly reasonable."¹⁸ This ability to forgive a part of the stipulated penalties partly removes the PRPs' financial disincentive in seeking dispute resolution.

The Bayou Sorrel consent decree thus deviates explicitly from the September 1987 EPA Guidance in two respects. First, though the Guidance states that "the Agency does not endorse the use of grace periods," this is exactly what the notice and opportunity to cure under tier three provides. The Guidance says that EPA would have preferred to use its discretion in such instances to forgive stipulated penalties.¹⁹

Second, the Guidance states that stipulated penalties generally should accrue for any noncompliance occurring during the period of dispute.²⁰ The Guidance contemplates that EPA may agree to waive the accrual of penalties in certain circumstances. The Bayou Sorrel consent decree shifts this authority from EPA to the court for up to 50 percent of the penalty. This is a fairer procedure from the standpoint of PRPs, while still discouraging spurious invocation of dispute resolution.

An important innovation is the liberal use of penalty tiers in the Bayou Sorrel consent decree. The September 1987 EPA Guidance is silent on use of tiers, so presumably government negotiators have considerable latitude in this area. Their creative use, as here, can lessen some PRP concerns over stipulated penalties by reducing penalty amounts for minor infractions.

An Important Precedent

The Bayou Sorrel consent decree signals PRPs that EPA will consider deviations from its Guidance where objectives of timely compliance and avoidance of frivolous invocation of dispute resolution are not sacrificed. In future consent decrees, EPA could send an even stronger signal by agreeing that the court can forgive up to 100 percent of the accrued stipulated penalties where the settling parties meet the "substantially justified" standard. A PRP with a substantially justified position, not an easy standard to meet, should have its day in court without fear of reprisal. EPA's agreement to the expansion of this concept and the adoption of alternative dispute resolution mechanisms that fall short of the invocation of court review of disputes will demonstrate to PRPs that EPA will implement CERCLA in a way that encourages their participation where EPA's environmental objectives are not sacrificed. With the large clubs provided by §§ 122(l) and 113(j), EPA can afford to speak more softly when stipulated penalties and dispute resolution are at issue. And given the statutorily mandated cleanup pace EPA must reach, it may have no choice.

1. CERCLA § 116(e), 42 U.S.C. § 9616(e), ELR STAT. 44045.

2. Cf. Mays, Alternative Dispute Resolution and Environmental Enforcement: A Noble Experiment or a Lost Cause?, 18 ELR 10087, 10088 (Mar. 1988) (warning of a serious enforcement backlog if too many enforcement cases are litigated).

3. The Bayou Sorrel consent decree would settle United States v. Allied Corp., No. 88-234A (W.D. La. lodged Mar. 17, 1988).

4. See, e.g., EPA Guidance on Drafting Consent Decrees in Hazardous Waste Cases, 20 (May 1, 1985) (listed at ELR ADMIN. MAT. 35000:9).

5. 42 U.S.C. § 9621(e)(2), ELR STAT. 44056.

6. 42 U.S.C. § 9622(l), ELR STAT. 44063.

7. CERCLA § 109, 42 U.S.C. § 9609, ELR STAT. 44031. It is not clear whether this penalty applies to each individual violation, and whether it is in addition to stipulated penalties accruing against the violator.

8. 42 U.S.C. § 113(j), ELR STAT. 44042.

9. EPA, Guidance on Use of Stipulated Penalties in Hazardous Waste Consent Decrees (Sept. 21, 1987).

10. Cf. Train v. Natural Resources Defense Council, 421 U.S. 60, 92 (1975) ("This litigation, however, is carried out on the polluter's time, not the public's ….").

11. Guidance, supra n.9, at 5.

12. Id.

13. Id. at 7. This is a typical EPA methodology for determining penalties. See, e.g., EPA, Revised Clean Air Act Source Civil Penalty Policy, 3-8 (Mar. 25, 1987).

14. On the advantages of alternative dispute resolution generally, see Mays, Alternative Dispute Resolution and Environmental Enforcement: A Noble Experiment or a Lost Cause?, 18 ELR 10087 (Mar. 1988).

15. Bayou Sorrel consent decree, supra note 3, Section XVII.A., pp. 35-37.

16. Id. at 38.

17. 28 U.S.C. § 2412(d)(1)(A), ELR STAT. ADMIN. PROC. 010.

18. Guvette v. Office of Personnel Management, 785 F.2d 1568, 1579 (Fed. Cir. 1986); Comment, Who Pays for Litigation: Recent Developments in Attorneys Fees Law, 15 ELR 10348 (1985).

19. Guidance, supra n. 9, at 7.

20. Id. at 5.