Would the Superfund Response Cost Allocation Procedures Considered by the 103d Congress Reduce Transaction Costs?

George Van Cleve

George Van Cleve is Of Counsel to Jones, Day, Reavis & Pogue. He served formerly as Deputy Assistant Attorney General for the Environment and Natural Resources Division of the U.S. Department of Justice. The author wishes to thank David T. Buente, Esq., for reviewing this Dialogue and providing useful comments and materials. The views expressed here are solely those of the author.

[25 ELR 10134]

One of the most prominent issues in the Congressional debate over reauthorization of the Comprehensive Environmental Response, Compensation, and Liability Act (CERCLA or Superfund)¹ has been how to reduce "transaction costs" while at the same time fairly and expeditiously resolving liability disputes.² This Dialogue asks: Would the allocation procedures proposed in last year's Superfund reauthorization bills³ meet those sometimes conflicting goals?

The Problem: The Massive Size and Stubborn Causes of Superfund Transaction Costs

There does not appear to be any definitive study of Superfund transaction costs that establishes either the actual size of those costs, or their causes. The limited available empirical data suggest that somewhere between 25 and 35 percent of all monies spent at Superfund sites through 1992 were spent on transaction costs.⁴ Of the total of approximately $ 2 billion in transaction costs, private parties apparently spent about 40 percent and insurers about 60 percent.⁵ According to the Congressional Budget Office, it is likely that transaction costs for nonfederal facility sites will continue to approximate 20 percent of total program expenditures, or some $ 40 billion through the remaining life of the program, unless they are limited.⁶ All parties to the Superfund reauthorization debate agreed that these costs were unacceptably high.⁷

As to the causes of transaction costs, there was much less agreement. Those parties favoring repeal or sharp curtailment of the Superfund joint, several, and retroactive liability scheme tended to blame that liability scheme for the Superfund program's high transaction costs. Defenders of the liability scheme, on the other hand, argued that high transaction costs were a result of the U.S. Environmental Protection Agency's (EPA's) failure to use its administrative authorities to manage the liability allocation process effectively, and of the litigiousness of all parties to insurance disputes. There appears to be some evidence to support both points of view.

Economists who have studied the Superfund program apparently believe that the joint, several, and retroactive liability system itself has caused the largest share of Superfund transaction costs. Lloyd Dixon, of the Rand Corporation, testified:

[O]ur work has demonstrated that Superfund has induced considerable transaction costs and raises doubts whether Superfund's liability approach, as currently implemented, is an efficient way to clean up the Nation's hazardous waste sites. Whether these transaction costs can be justified depends on the benefits of the liability approach, such as voluntary cleanups and site discoveries, what alternative approaches are possible, and the transition costs of moving to an alternative approach.⁸

[25 ELR 10135]

The authors of another major Superfund policy study apparently agreed with Dixon that at least the lion's share of transaction costs has been caused by the liability scheme:

Several kinds of transactions costs arise under the current law. . . . These include settlement negotiations between the government and the PRPs [potentially responsible parties]; litigation by the government against PRPs; cost allocation negotiations among PRPs; litigation among PRPs; litigation between PRPs and their insurers; and, eventually, litigation between insurers and their reinsurers. . . .

Data compiled by RAND, however, suggest that total transactions costs are probably measured in hundreds of millions of dollars annually. We hasten to add [that] . . . [N]ot all transactions costs result from the liability standards per se; some are no doubt due to other aspects of the implementation of the law.⁹

It is also clear, however, that EPA has not made significant use of its existing legal powers to limit transaction costs. EPA already has the authority to perform a thorough search for all potentially responsible parties (PRPs) and to release the results of that search. Normally, however, EPA fails to do so.¹⁰ EPA has the authority to require all PRPs to provide information about their waste disposal activities at various Superfund sites, but it normally does not do this either.¹¹ EPA has the authority to make nonbinding allocations of responsibility at Superfund sites, but it almost never does this.¹² EPA has the ability to reach early settlements with small waste contributors at virtually any Superfund site where small contributors can be distinguished from large contributors, but it normally does not do this.¹³ EPA's inaction leaves the costs and delay of all transactions that do not directly involve the Agency to later contribution litigation between the PRPs. This approach, however, allows EPA to maximize its efforts to advance Congress' primary goals (under the existing Superfund Act) of speedy cleanup and limited cost to taxpayers.

Whatever the merits of these respective positions on the causes of high Superfund transaction costs, the Clinton Administration and the coalition supporting Superfund reauthorization¹⁴ made several basic policy decisions as starting points for reauthorization. First, CERCLA's existing liability system was to remain unchanged. Second, the controversy between PRPs and insurers was to be addressed separately from the controversy over response cost allocation.

Some observers might conclude that absent changes in Superfund's liability scheme or the insurance system, the reauthorization bills would be capable of controlling, at best, only a fraction of the total transaction costs associated with the Superfund program. Even if the bills' proposed response cost allocation procedures¹⁵ worked remarkably well, it would be unrealistic, in this view, to expect them to reduce transaction costs by more than 25 percent.¹⁶ Yet even a 25 percent reduction in transaction costs could save $ 10 billion,¹⁷ and such savings are undoubtedly desirable.

Thus, response cost allocation procedures could play a role in controlling overall transaction costs for the Superfund program. The question remains, however, whether the procedures proposed in the 103d Congress could realistically be expected to fulfill that role. The three primary criteria for judging the proposed allocation procedures should be: Are they fair? Are they fast? And are they significantly cheaper? On the basis of the available evidence, it is likely that the allocation procedures proposed last year would meet these criteria and contribute significantly to Superfund transaction cost reduction. This Dialogue, however, suggests some ways in which the procedures could be improved.

The Proposed Solution: Allocation Procedures

The Proposed Multiparty Response Cost Allocation Procedures

The bills would establish an allocation system that would be automatically mandatory at all (1) nonfederally owned Superfund facilities (2) that involve two or more PRPs, and (3) for which the government selects remedial action on or after February 3, 1994.¹⁸ In addition, the procedures could become [25 ELR 10136] mandatory at certain facilities at the request of a PRP who has settled with the government, and EPA would have discretion to use them at certain other facilities.¹⁹ They apparently could not be used at all at other, specified facilities, including sites at which all PRPs are potentially liable as past or current owners or operators, rather than as generators or transporters.²⁰

All cost recovery and contribution litigation relating to the site would be stayed pending the conclusion of the allocation process.²¹ EPA would be required to initiate a search for all PRPs at the site within 60 days after beginning a remedial investigation and to conclude that search within 18 months (during which period EPA could delay the beginning of the allocation process).²² EPA would then be required to make public a list of the PRPs and all nonconfidential information in its possession.²³ PRPs would be allowed a limited time to nominate additional PRPs.²⁴ Certain smaller (de minimis and de micromis) parties would be excluded from the allocation process.²⁵

The bills set forth a process for choosing allocators²⁶ and would give EPA a veto over the choice.²⁷ Allocators would have specified powers, including the power to obtain information necessary to perform the allocation.²⁸ They would prepare and issue reports containing "nonbinding, equitable" allocations of the percentage shares of responsibility of allocation parties.²⁹ At any time prior to an allocator's report, PRPs could submit an agreed-on allocation of responsibility.³⁰ Allocators would use a form of informal "notice-and-comment" adjudication.³¹ They would base their decisions on allocation factors, specified by the bills,³² and EPA could promulgate additional allocation factors for consideration through notice-and-comment rulemaking.³³

All orphan shares at the facilities involved in allocations mandated by law would be paid for by the Hazardous Substances Trust Fund.³⁴ A mandatory appropriation not to exceed $ 300 million in any fiscal year would provide funding for federal payments of orphan shares.³⁵ At facilities nominated for mandatory allocation by PRPs, however, EPA would be permitted, but not required, to use the Trust Fund to pay for orphan shares.³⁶ The term "orphan share" would include shares attributable to identified but insolvent or defunct parties; the difference between shares assigned to municipal solid waste contributors and the shares actually assumed by those parties; and the difference between the aggregate share assigned to parties with a limited ability to pay and the shares actually assumed by those parties.³⁷

Importantly, shares attributed to hazardous substances that cannot be attributed to any identified party would be distributed among all parties, including the orphan share. There would be no explicit requirement, however, that such distribution be pro rata.³⁸

EPA and the Attorney General would have authority to reject jointly the allocation report on the basis of specified criteria.³⁹ Their decision to accept or reject the allocator's report would be exempt from judicial review.⁴⁰ If it accepted an allocation report, the United States would be required to accept settlement offers based on the report, subject to certain conditions.⁴¹ If, however, the United States rejected an offer of settlement made within the allotted time, and if the ultimate resolution of its liability were at least as favorable to the PRP as the offer, the defendant would recover its reasonable costs of defense incurred after making the offer.⁴² PRPs who settled based on the allocation would be reimbursed by the government for response work performed in excess of their allocated share.⁴³ Settlement offers would be required to include a waiver of contribution rights.⁴⁴

The government could sue recalcitrant parties for all unrecovered costs, as well as for any federally funded orphan [25 ELR 10137] share.⁴⁵ Defendants would be permitted to implead any other nonsettling party.⁴⁶ De minimis nonsettlors, however, would be protected against possible full joint and several liability.⁴⁷ In addition, any party that was not identified as an allocation party (or subsequently added through a specified exception procedure) could not be sued for contribution.⁴⁸ The allocator's report would not be admissible as evidence in the postallocation proceedings.⁴⁹

Key Issues Raised by the Proposed Procedures

* Coverage of the Mandatory Allocation Process. One significant potential benefit of the proposed allocation process is expeditious dispute resolution. Federal courts have exclusive jurisdiction over Superfund cases.⁵⁰ Federal court dockets in many parts of the country are crowded, and they will become far more crowded as a result of recent federal crime legislation, since priority is given by law to criminal prosecutions. Large potentially responsible parties (a category that could include the United States) can delay or avoid responsibility by essentially running a war of attrition against other defendants through extensive and expensive litigation. Because mandatory allocation would eliminate or greatly reduce the effectiveness of such a strategy, it is difficult to see why these procedures should not be mandatory at all Superfund sites, unless cost recovery litigation for a site is so advanced as to make the use of allocation procedures there impracticable.

The bills, however, exclude a substantial number of facilities from use of some or all of the procedures.⁵¹ This disparate treatment, which depends in part on when the government approved the sites' records of decision (RODs) and on the basis of the PRPs' potential liability, lacks justification.

The apparent reason for the decision to exclude sites with pre-February 3, 1994 RODs from automatic mandatory allocation is to limit the government's obligation to fund payments for orphan shares from the Hazardous Substances Trust Fund. The coverage of mandatory allocation procedures could be extended, however, even if the orphan-share payment system is not also extended.

As is perhaps inevitable, the cutoff line drawn by the bills for orphan-share payments is an arbitrary one. In this light, the further condition that — at sites with RODs selected before February 3, 1994 — only parties that have settled with EPA could invoke mandatory allocation appears doubly unfair. At post-February 1994 ROD sites, no one would be required to settle with EPA in order to receive the benefits of mandatory allocation. The policy argument for forcing parties at sites with earlier RODs to do so is unclear, especially since they would not automatically receive orphan-share payments as a result of the allocation. No doubt such a scheme would provide EPA with additional bargaining leverage over PRPs, but if the bills' purpose is to limit transaction costs by creating new allocation procedures, the benefits of these procedures should be distributed as widely as possible.

The apparent complete exclusion of "landowner only" facilities from the allocation process also does not make sense.⁵² Landowners who disposed of wastes on their own property prior to 1980 were no different than other companies — many of which were disposing of waste legally — and transaction costs for allocating liability at "landowner only" sites can be as high as costs at other sites.

* The Stay of Litigation. The bills' provisions for a moratorium on and stay of litigation pending the outcome of allocations are excellent ideas. In refining these provisions in the future, it will be important to account for: (1) state law causes of action and tolling of potential statutes of limitation pending conclusion of allocations; (2) the need to be clear about the scope of the stay, which should include contribution litigation as well as cost recovery litigation;⁵³ and (3) the relationship between the stay and possible insurance coverage litigation (if there is no legislation to create an insurance fund such as the one proposed by S. 1834).

* The EPA PRP Search. This provision of the proposed allocation system is well-intentioned, but inherently flawed. For reasons discussed above,⁵⁴ EPA does not do an efficient job on PRP searches. It is unlikely that Congress will expand EPA's funding to allow it to perform this task well, and the bills do not impose penalties on EPA for failing to perform adequate searches. As a result, this effort to shift transaction costs to EPA would likely fail, because PRPs would need to conduct their own PRP searches to protect themselves during the allocation process and in litigation. The only predictable result of this provision would be to allow EPA to delay the initiation of the allocation process for up to 18 months. The provision could be significantly improved by requiring EPA to begin and end its PRP searches much earlier in the process.

* Provision of Nonconfidential Information. The bills' provision that EPA provide all "nonconfidential" information to PRPs could be substantially improved by adding a definition of "confidential information" that takes into account the realities of Superfund litigation. For example, one issue that often divides parties in Superfund litigation is the question of financial viability. This presumably confidential information is available to the government in Superfund litigation under CERCLA § 104(e),⁵⁵ but is often not available to litigants in private contribution litigation. Moreover, the information's unavailability often impedes meaningful settlement discussions.

Similarly, information about historical facility production processes could — in theory — be confidential business information, but could also be an essential part of reconstructing the nature and causes of contamination at a site. Also, it is not clear who would have the burden of proof in a dispute over disclosure of allegedly confidential information. [25 ELR 10138] Should someone who wants production process information, which is relevant to the Superfund dispute, have the burden of showing it is not confidential, or should the burden be with the party which wishes to resist disclosure? Should the answer depend on whether it is EPA's information that EPA wishes to keep confidential, or whether it is a private party's information? Finally, the bills do not clearly indicate how disputes about disclosure would be litigated.⁵⁶

* Nomination of Additional PRPs. The provision for nomination of additional PRPs is an essential one. At the same time, the idea that if a party is named as a PRP and is allocated a zero share, that party should be reimbursed for its reasonable costs, is an important protection against unjustified inclusion in the allocation process. These reimbursement provisions would work better, however, if the bills made clear the likely circumstances under which a zero share would be allocated. For example, suppose that a PRP is an intermediate landowner, who purchased the property without necessary due diligence after CERCLA was passed. Suppose further that the allocator determines that this party contributed no contamination to the property but, through its inaction, allowed the contamination on the property to worsen substantially during its ownership. Under present law, depending on the federal circuit, such a landowner would either be liable under CERCLA § 107(a)(2) and be allocated a share (though perhaps a small one) of responsibility, or not be considered liable at all.⁵⁷ The bills as written would not help anyone determine whether such a party should, or should not, be nominated as a PRP and they would make other PRPs pay the landowner's attorneys fees if they guessed wrong about the law.⁵⁸

* Nonbinding Arbitration. The bills expressly provide that the allocation report will be a "nonbinding, equitable" allocation of responsibility. The coalition supporting Superfund reauthorization rejected calls for a binding allocation process conducted by an administrative law judge with a limited right of judicial appeal of allocators' decisions. The decision to avoid creating a limited, specialized administrative/judicial forum to make allocation judgments is one with important consequences, which Congress may wish to revisit.

Congress has periodically recognized the necessity of creating litigation forums in which all parties who have an interest in a dispute could be compelled to litigate or lose their right to do so. Two examples that come readily to mind are bankruptcy courts and river-basin-wide waterrights adjudications. When these procedures apply, all interested persons are compelled to come forward and litigate their interest in a comprehensive claims proceeding, or lose their rights. Such forums employ a single decisionmaker, typically a judge, and allow limited further review of the judge's decisions. The underlying idea of binding allocation procedures for Superfund is no different than the concept behind these recognized traditional procedures, with one important exception. This exception is that the allocator would be expected to take an active role in determining liability, rather than merely refereeing an adversary contest. In short, the allocator would act as a European civil law magistrate, not as a U.S. judge.

While the flexible procedures proposed for such Superfund binding allocations, which did not provide for rights to hearings or to cross-examination, may have been somewhat less protective of parties than procedures in bankruptcy or water rights adjudication, it is clear there is no constitutional obstacle to such expeditious procedures.⁵⁹ There would be some very important advantages to the binding allocation procedures rejected by the 103d Congress. The first is that the procedures could fully bind the United States, as well as other litigants. Another is that they would not need to rely on the "carrot" of outside financing for the orphan share to induce PRPs to participate in comprehensive settlements. It is not at all clear whether this "carrot" will be available when Congress ultimately reauthorizes Superfund. Finally, the fact that all parties to an allocation would be bound by the results would, in itself, help allocation procedures reduce transaction costs.

In general, however, although the Superfund reauthorization bills would purport to create "nonbinding" allocation, the proposed procedures are a far cry from purely voluntary mediation. Indeed, it may be misleading legislative advertising to call these allocation procedures or the allocation report "nonbinding," because they attempt to create a Hobson's choice for PRPs. PRPs would be required either to accept the proposed allocation and settle on that basis, or to suffer potentially draconian consequences in later litigation, such as imposition of responsibility for the entire orphan share as well as for all remaining unrecovered response costs.⁶⁰

The bills further attempt to "bind" PRPs to the results of the allocation by creating a swift, fair, and powerful adjudicatory process that will effectively stack the deck against nonsettlors in subsequent litigation. The following points are worthy of particular note in this regard.

First, PRPs could be compelled to participate in the allocation process through subpoenas for documents and testimony. PRPS may be required to pay civil penalties, and would be required to pay attorneys fees, if they resisted enforcement of a subpoena without substantial justification.⁶¹ This is a critical [25 ELR 10139] provision, and Congress would be well-advised to specify clearly the meaning of "substantially justified" to ensure its consistent enforcement. It is unclear, however, why the United States should be responsible for enforcement of these subpoenas, since this effectively would give it influence over the allocator's fact-finding powers, and arguably would limit the allocator's independence.⁶²

Allocators would have the power to act expeditiously using flexible procedures, and a deadline would be imposed for issuance of their reports.⁶³ The bills' provision that allocators need only follow a flexible "notice-and-comment" procedure would promote prompt action.⁶⁴ However, the bills do not specify what rules of evidence or procedure would govern allocation proceedings. The catchall power to "take any other actions necessary to conduct a fair, efficient, and impartial allocation process" may be intended to allow allocators to choose rules of evidence and procedure.⁶⁵ If this is the intent, however, it would be better to say it explicitly to avoid subsequent disputes. In particular, it would be helpful to know whether allocators could disregard evidentiary rules against hearsay testimony.

In a virtually unprecedented provision of enormous power, various evidentiary privileges such as the attorney-client privilege would not apply to an allocator's power to obtain information.⁶⁶ EPA would also be required to provide confidential information it possessed to the allocator.⁶⁷ These provisions would doubtless strengthen the allocator's ability to obtain information. It is important to recognize, however, that this limited abolition of evidentiary privileges would also have adverse effects. The information provided to the allocator would be provided to adverse parties.⁶⁸ Although the bills provide that the information would not be discoverable or admissible in any other proceeding, once information is known to other parties, "the bell cannot be unrung."

"Limited" abolition of privilege would seriously weaken PRP counsels' ability to communicate frankly with clients on fundamental issues such as the scope of liability, since clients would not want counsel to communicate their views on such matters if the information will be available to the allocator and to adversaries.⁶⁹ Abolition of privileges would also sharply reduce the willingness of PRPs to conduct candid internal studies and planning on liability (and possibly remedial) issues which might then have to be delivered to the allocator or other PRPs.

As a result, PRPs might often be less well-informed and less realistic about their factual and legal positions, and accordingly less able to provide useful analyses to the allocator or to take well thought-out negotiating positions. In short, in return for what may in many cases (particularly as time goes on) be a marginal gain in information, this provision would reduce the quality of PRP participation in both the development of factual information and in the process of negotiating settlements.⁷⁰

The allocator would be required to employ a version of the "Gore factors" as a basis for his or her decision on equitable shares for the parties.⁷¹ While EPA could specify additional allocation factors by rule, however, the bills would essentially turn these factors into guidelines by providing that an allocator's report could not be rejected solely on the basis that the allocator did not consider one or more of these additional factors.⁷²

It is worth noting that many important liability issues would not be resolved by the Gore factors, and that Congress has deliberately avoided expressing its views on a number of these issues.⁷³ Congress appears content to allow the federal courts to continue to develop the interplay of general corporation law and environmental law as they have done over the past decade or so. As a result, it is not unrealistic to expect that allocators would reach differing results on certain fundamental liability issues.⁷⁴

While an allocator's report would technically be inadmissible [25 ELR 10140] as evidence in subsequent litigation, the bills contain a loophole as wide as the Mississippi on this point. The bills provide that while the reports would not be admissible as evidence, they could be considered by the court in making an allocation.⁷⁵ Since allocation reports would be based on the work of neutral factfinders with access to substantially all relevant information, and because the United States would probably have enhanced the reports' legitimacy by accepting settlements based on them, it is difficult to believe that most judges would not be heavily swayed by the allocators' conclusions. The inevitable result would be that allocation reports will heavily influence subsequent court action, despite their technical inadmissibility.⁷⁶ To avoid this source of prejudice in subsequent judicial proceedings, parties to an allocation may devote almost as many resources to litigating before allocators as they do now to litigating before judges. By creating an incentive for parties to incur high transaction costs, therefore, this provision would undercut the very purpose of the nonbinding allocation process.⁷⁷

An allocator's report could not be rejected by the United States except on narrowly specified grounds by both the EPA and the Department of Justice.⁷⁸ This provision should make it unusual for allocation reports to be rejected, despite the fact that this decision would not be judicially reviewable. At the same time, the provision is an example of an unfortunate congressional tendency to limit the prosecutorial authority of the Department of Justice through the back door, thus diluting accountability. It would be preferable for consistency in the development of environmental law for the Department of Justice to have final authority. If the "joint approval" requirement arises in part because there is concern about potential conflicts stemming from Department of Justice representation of federal PRPs, it would be preferable to have that issue dealt with directly.

In theory, the bills would require EPA to settle on the basis of the allocator's report or risk the consequences.⁷⁹ It is of fundamental importance that the government be bound by the results of the allocation if the process is to work. The bills, however, would allow EPA to refuse to settle on the basis of loosely or completely unspecified conditions concerning, for example, the performance of work by settlors.⁸⁰ There is little to be said for allowing EPA to try to negotiate after the fact for increased PRP responsibility that it could not establish in the allocation process itself. Indeed, persistent efforts to avoid finality in the administrative process are a major source of Superfund transaction costs. Congress should clearly specify the conditions under which EPA may refuse to settle based on an allocator's report.

The bills provide that private settlements prior to the allocation report would be given effect if they met certain conditions.⁸¹ This is a useful concept, but its utility would be limited by two factors: (1) the limited abolition of privilege, and (2) the timing of the allocation process. The first factor, which has already been discussed, might seriously limit PRPs ability to conduct informed negotiations. The second factor reflects the fact that PRPs are usually very reluctant to negotiate settlements until they have a relatively clear idea of the total cost of cleaning up a site. The allocation process may occur before a ROD is issued for the site, and even before certain significant studies are completed. It may be difficult for PRPs to negotiate among themselves in the absence of adequate information about site cleanup costs.

Clearly, litigation subsequent to an allocation report would be an exceedingly uphill battle for nonsettlors. The nonsettling PRP would litigate at a severe procedural disadvantage for the reasons reviewed above. In addition to potentially large exposure for the orphan share and unrecovered response costs, the nonsettling PRP could also end up paying for a significant fraction of the allocator's costs. The result for a nonsettling PRP may be liability substantially disproportionate to the PRP's contribution to contamination at the site.

Conclusion

All in all, the proposed legislation would create powerful incentives for PRPs to settle on the basis of their allocated shares. The process established by the reauthorization bills meets many, if not all, of the objections raised by advocates of binding allocation. Indeed, the allocation procedure in the bills meets so many of these objections that it would be fair to call it "virtually binding" allocation, which — in the "virtual reality" of Superfund — may be as close as one can come to binding allocation. Superfund transaction costs will likely decline significantly if the proposed response cost procedures are adopted.⁸²

1. Comprehensive Environmental Response, Compensation, and Liability Act, 42 U.S.C. §§ 9601-9675, ELR STAT. CERCLA §§ 101-405.

2. "Transaction costs" are those costs incurred in resolving disputes about which entities are responsible for site-response (as opposed to actual site response costs). JAN P. ACTON & LLOYD S. DIXON, SUPERFUND AND TRANSACTION COSTS: THE EXPERIENCES OF INSURERS AND VERY LARGE INDUSTRIAL FIRMS ix-x (Rand Corp. 1992) [hereinafter the RAND STUDY].

3. In this Dialogue, the terms "Superfund reauthorization bills" or "the bills" refer to S. 1834 and H.R. 4916, 103d Cong., 2d Sess. (1994).

4. Superfund Reauthorization: Hearings Before the Subcommittee on Superfund, Recycling, and Solid Waste Management of the Senate Committee on Environment and Public Works (S. Hrg. 412), 103d Cong., 1st Sess. 722-23 (1993) (statement of Lloyd Dixon, Rand Corp.) [hereinafter "Dixon Testimony"]. No serious challenge to the RAND STUDY, supra note 2, was made during the congressional hearings on Superfund reauthorization. The House Committee on Energy and Commerce cited the RAND STUDY for the proposition that approximately one out of every three dollars were spent on transaction costs. H.R. REP. NO. 582, 103d Cong., 2d Sess., pt. I, at 100 (1994) [hereinafter HOUSE SUPERFUND REPORT].

5. CONGRESSIONAL BUDGET OFFICE, THE TOTAL COSTS OF CLEANING UP NONFEDERAL SUPERFUND SITES 11 (1994).

6. Id. at 17 tbl. 4, 30.

7. It is noteworthy, however, that the authors of the RAND STUDY, supra note 2, believed that Superfund transaction costs were about average in comparison to transaction costs associated with the tort liability system. They pointed out that although some transaction costs, such as those involved in airplane crash liability actions, are lower on average than those incurred under the Superfund program, other transaction costs, such as those involved in asbestos litigation, are higher. DIXON TESTIMONY, supra note 4, at 728.

8. DIXON TESTIMONY, supra note 4, at 723.

9. KATHERINE N. PROBST & PAUL R. PORTNEY, ASSIGNING LIABILITY FOR SUPERFUND CLEANUPS: AN ANALYSIS OF POLICY OPTIONS 22, 24 (Resources for the Future 1992) (emphasis added).

Although it is certainly true that transaction costs would be incurred under any liability scheme that relied on litigation for dispute resolution, some observers believe that the joint, several, and retroactive nature of CERCLA liability greatly increases these costs over levels that would be incurred under other liability schemes.

10. HOUSE SUPERFUND REPORT, supra note 4, at 101-02.

11. 42 U.S.C. § 9604(e), ELR STAT. CERCLA § 104(e); U.S. GENERAL ACCOUNTING OFFICE, SUPERFUND: FURTHER EPA MANAGEMENT ACTION IS NEEDED TO REDUCE LEGAL EXPENSES 6 (No. B-253857, 1994) [hereinafter GAO REPORT].

12. GAO REPORT supra note 11, at 5 (reporting that EPA has conducted only five nonbinding allocations of responsibility at 1,074 national priorities list (NPL) sites).

13. GAO REPORT, supra note 11, at 5 (reporting that EPA has entered into 128 de minimis settlements at 78 out of 1,074 NPL sites).

An important question is why EPA does not try to limit private-party transaction costs, since it obviously has the power to do this. The short answer is that, at congressional direction, EPA's first priority is assigning responsibility for site cleanup and getting cleanup underway as quickly as possible. The best EPA strategy for doing this is to target one or more "deep pockets" and to coerce them into cleaning up the site. That EPA acts in this manner is not simply a result of historical experience or administrative predilection, though it is both of those things. Economic game theory predicts this will be the best strategy for EPA where there are multiparty sites under a regime of strict, joint, and several liability.

Suing more parties than necessary to secure the full amount of damages would raise litigation costs with no commensurate benefit. The government's Nash equilibrium strategy, therefore, would be to sue the smallest number of PRPs possible and still receive the full damages. How would the government select those PRPs to target for litigation? . . . [T]he government would target the wealthiest PRPs to assure that the damages could, and would, be paid.

Tom H. Tietenberg, Indivisible Toxic Torts: The Economics of Joint and Several Liability, LAND ECON., Nov. 1989, at 305, 312-13.

14. See Rena I. Steinzor, The Reauthorization of Superfund: Can the Deal of the Century Be Saved?, 25 ELR 10016, 10017-18 & nn.7, 20 (Jan. 1995) (providing information about the coalition).

15. The proposed allocation system is discussed in detail below. See infra notes 18-49 and accompanying text.

16. With some simplifyingassumptions, this can be seen in the following manner. If 60 percent of total transaction costs are attributable to insurance disputes, and if one conservatively assumes that only 20 percent of the remaining costs result from the liability system, the allocation procedures would need to be 80 percent more efficient than the present system to reduce total transaction costs by 25 percent.

17. See supra note 6 and accompanying text.

18. The proposed response cost allocation procedures are contained in S. 1834, supra note 3, § 409. This section would add a new § 129 to CERCLA. Comparable provisions are contained in H.R. 4916, supra note 3, § 413.

19. In this event, however, there would be no requirement that the United States fund any "orphan share" from the Hazardous Substances Trust Fund. See § 129(a)(7) (as proposed by S. 1834, supra note 3, § 409).

20. The bills are ambiguous on whether the exclusion of certain facilities is intended to bar EPA from initiating discretionary allocations there, though this appears to be the intent. Compare § 129(a)(1)-(3) with § 129(a)(4) (as proposed by S. 1834, supra note 3, § 409).

21. § 129(b) (as proposed by S. 1834, supra note 3, § 409).

22. § 129(c)(1); § 129(c)(3) (as proposed by S. 1834, supra note 3, § 409).

23. § 129(c)(3) (as proposed by S. 1834, supra note 3, § 409).

24. § 129(c)(5) (as proposed by S. 1834, supra note 3, § 409).

25. § 120(c)(1); § 129(c)(6)(C); § 129(d) (as proposed by S. 1834, supra note 3, § 409).

26. § 129(e) (as proposed by S. 1834, supra note 3, § 409).

27. § 129(e)(3) (as proposed by S. 1834, supra note 3, § 409).

28. § 129(i) (as proposed by S. 1834, supra note 3, § 409).

29. § 129(h) (as proposed by S. 1834, supra note 3, § 409).

30. § 129(g) (as proposed by S. 1834, supra note 3, § 409).

31. § 129(h)(4) (as proposed by S. 1834, supra note 3, § 409).

32. § 129(h)(2) (as proposed by S. 1834, supra note 3, § 409).

33. § 129(h)(2)(G) (as proposed by S. 1834, supra note 3, § 409).

34. § 129(r) (as proposed by S. 1834, supra note 3, § 409).

35. Id. Obviously, when Congress reconsiders Superfund, it will be important to be attentive to whether this is a "real" appropriation of new money, or simply an earmarking of Trust Fund moneys if and to the extent they are available.

36. § 129(a)(7). There apparently is nothing in the bills which would prevent EPA from making Trust Fund contributions to an orphan share at such sites, but this is not required, and EPA is unlikely to have funds available.

37. § 129(h)(4) (as proposed by S. 1834, supra note 3, § 409). Others may wish to ask what the phrase "insolvent or defunct parties who are not affiliated with any viable allocation party" is supposed to mean, in view of the state of existing law on issues such as successor liability. See, e.g., Anspec v. Johnson Controls, Inc., 922 F.2d 1240, 21 ELR 20497 (6th Cir. 1991).

38. As far as the Superfund liability framework is concerned, it is unclear that there is any conceptual difference between "orphan" waste generated by a bankrupt entity and "orphan" waste generated by an unknown party. Arguably, paying from the Superfund Trust Fund for all waste generated by bankrupt, but known, entities and only a fraction of the waste generated by unknown parties would maximize PRP incentives to identify waste generators. However, the fact that there is no standard established for allocation of this "unknown" waste may mean that some allocators would assign it in large part to the orphan share while others would not. This would be an undesirable result, since two allocators could develop sharply varying allocations. Consider this hypothetical example: 20 percent of the waste comes from bankrupt orphans; 20 percent from unknown sources; and 60 percent from identified PRPs. One allocator might decide that the total orphan share was nearly 40 percent, while another might conclude that the PRPs should carry that share, and have the orphan share be as little as just slightly above 20 percent. If pro rata distribution of unknown shares is intended, it would be well for the legislation to state this explicitly.

39. § 129(l) (as proposed by S. 1834, supra note 3, § 409).

40. Id.

41. § 129(o) (as proposed by S. 1834, supra note 3, § 409).

42. § 129(p)(4)(as proposed by S. 1834, supra note 3, § 409).

43. § 129(q)(1) (as proposed by S. 1834, supra note 3, § 409).

44. § 129(o)(3) (as proposed by S. 1834, supra note 3, § 409).

45. § 129(p) (as proposed by S. 1834, supra note 3, § 409).

46. Id.

47. Id.

48. Id.

49. § 129(p)(4) (as proposed by S. 1834, supra note 3, § 409).

50. 42 U.S.C. § 9613(a), ELR STAT. CERCLA § 113(a).

51. See supra notes 18-20 and accompanying text.

52. See supra note 20 and accompanying text. Though the legislation is not clear on this point, it appears that if anyone can require an allocation process at "landowner only" sites, it would be EPA. This would, in all likelihood, mean that at federal facilities, the allocation process could occur only with EPA consent.

53. In this regard, S. 1834, supra note 3, is clearer than H.R. 4916, supra note 3.

54. See supra note 13. It is unrealistic to expect the marginal cost to the Trust Fund (up to the statutory cap) of paying for "missed PRP" orphan shares to motivate EPA to improve its searches.

55. See supra note 11.

56. Whether such a dispute would be subject to the stay of proceedings mandated by the bill is also unclear. Nor is there a clear logical relationship between the provision that allows EPA to withhold confidential information from PRPs, and later provisions which then grant an allocator (and allocation parties) access to what may be the same information. Compare § 129(c)(3)(D) with § 129(k) (as proposed by S. 1834, supra note 3, § 409).

57. Compare Nurad, Inc. v. William E. Hooper & Sons Co., 966 F.2d 837, 22 ELR 20936 (4th Cir.), cert. denied, 113 S. Ct. 377 (1992) with Ecodyne Corp. v. Shah, 718 F. Supp. 1454, 20 ELR 20172 (N.D. Cal. 1989).

58. Nor does it make sense for funding for EPA errors in this regard to be taken from the orphan share funds made available under the bill, since this punishes other parties for EPA's mistake.

59. While it is commonly said that constitutional concerns were paramount in Congress' decision to reject binding allocation, there is no substantial basis for such constitutional concerns. Letter from David T. Buente, former Chief, Environmental Enforcement Section, U.S. Department of Justice Environment and Natural Resources Division, to Leonard Shen, Esq., December 3, 1993, re: "Constitutionality and Practical Advantages of Binding 'Up-Front' Administrative Determination of Liability and Allocation of Responsibility Under the Superfund Act" (on file with ELR). The letter provides a detailed review of constitutional arguments — particularly due process arguments — against summary administrative adjudications and concludes that the arguments lack merit. See, e.g., Concrete Pipe and Prods. of Cal., Inc. v. Construction Laborers Pension Trust for S. Cal., 113 S. Ct. 2264 (1993); Thomas v. Union Carbide Agric. Prods. Co., 473 U.S. 568, 593 (1985).

60. See supra note 45.

61. § 129(j) (as proposed by S. 1834, supra note 3, § 409). See also S. 1834, supra note 3, § 402(b) (proposed definition of "sufficient cause," as that term is used in the context of 42 U.S.C. § 9607(c)(3), ELR STAT. CERCLA § 107(c)(3)).

62. § 129(j)(2) (as proposed by S. 1834, supra note 3, § 409). If the example of the independent counsel is any guide, there would be no constitutional requirement that the United States enforce such subpoenas if, for example, the allocator became an officer of the United States by court appointment pursuant to statute.

63. § 129(h) (as proposed by S. 1834, supra note 3, § 409).

64. See supra note 31.

65. § 129(i)(2) (as proposed by S. 1834, supra note 3, § 409).

66. § 129(k) (last sentence) (as proposed by S. 1834, supra note 3, § 409). Technically, this elimination of privileges does not apply in subsequent litigation or other proceedings, and is therefore referred to here as "limited."

67. § 129(k) (as proposed by S. 1834, supra note 3, § 409). This would include trade secret information, which would then be provided to PRP competitors. It is difficult to see any improvement in the allocation process which would outweigh the adverse competitive effects of such compelled disclosure of trade secrets.

68. It could be argued that the bill is ambiguous on this point, but this appears to be the drafters' intent, as the document repository is to contain "all documents and information" provided "by the allocation parties." All information in the repository would be available to all parties. The effect of requiring a party to disclose otherwise privileged information to the allocator would thus be to make it available to all parties.

69. In theory, this provision might be narrowed so that legal opinions, as opposed to factual conclusions, of counsel were protected from disclosure. However, this narrowing would be of limited benefit, since counsel play a significant role in the fact-finding process, as discussed below.

70. Some will doubtless argue that limited abolition of evidentiary privileges will correspondingly reduce the role of counsel in the allocation process, and that this is a desirable result. Yet high quality adversary presentation of the facts is a major benefit of attorney participation in the type of historical reconstruction process often required in Superfund cases. If the role of counsel is reduced too far, this substantial benefit to the process will be lost.

71. § 129(h)(2) (as proposed by S. 1834, supra note 3, § 409). The Gore factors include the following criteria:

(i) the ability of the parties to demonstrate that their contribution to a discharge release or disposal of a hazardous waste can be distinguished;

(ii) the amount of the hazardous waste involved;

(iii) the degree of toxicity of the hazardous waste involved;

(iv) the degree of involvement by the parties in the generation, transportation, treatment, storage, or disposal of the hazardous waste;

(v) the degree of care exercised by the parties with respect to the hazardous waste concerned, taking into account the characteristics of such hazardous waste; and

(vi) the degree of cooperation by the parties with Federal, State, or local officials to prevent any harm to the public health or the environment.

United States v. A&F Materials Co., 578 F. Supp. 1249, 1256, 14 ELR 20105, 20108 (S.D. Ill. 1984).

72. § 129(h)(2) (as proposed by S. 1834, supra note 3, § 409).

73. A number of smaller liability issues, e.g., liability resulting from bequests or inheritances, would be dealt with by the proposed legislation.

74. However, with allocators it is less predictable when this inconsistency will occur. In the federal courts, where a court of appeals has taken a clear position on a legal issue, that decision is to be followed by the lower courts of the circuit. There is no requirement in the legislation that allocators follow the law of any particular court.

75. § 129(p)(4) (as proposed by S. 1834, supra note 3, § 409). Of course, under existing law, the court will decide most Superfund cases.

76. This provision reinforces the point that once the attorney-client privilege is subject to limited abolition in the allocation proceeding, it is effectively lost. The allocator's report may contain or be founded on knowledge obtained from privileged matter.

77. This point illustrates the fact that legislative drafters who hope to avoid excessive Superfund transaction costs must be sensitive to the incentives created by each aspect of the allocation provisions they draft. Legislative compromises that result in vague, ambiguous, or needlessly complex procedures invite controversy and, thus, encourage transaction costs.

78. § 129(l) (as proposed by S. 1834, supra note 3, § 409).

79. See supra note 41-42 and accompanying text.

80. § 129(o) (as proposed by S. 1834, supra note 3, § 409) (stating that to limit EPA's right to seek additional response costs, PRPs' offers must be "based on the share specified by the allocator and on the additional terms and conditions of settlement (other than the percentage share of liability) that are acceptable to the President. . . ."); see also § 129(p)(6) (as proposed by S. 1834, supra note 3, § 409) (as proposed by S. 1834, supra note 3, § 409). Certain language in the House Superfund Report can be seen as an effort to narrow EPA's discretion in this regard, but that language might have little practical affect on EPA's willingness to settle. See HOUSE SUPERFUND REPORT supra note 4, at 105-06.

81. § 129(g) (as proposed by S. 1834, supra note 3, § 409).

82. This does not mean that no subsequent litigation would occur. There would be circumstances where fundamental legal issues, such as the basis for liability of a PRP, shape theoutcome of a proceeding, and a PRP may be willing to challenge a report based principally on the allocator's position on such a legal issue. In addition, PRPs who were assigned a share of "unidentified" contamination that they believed to be disproportionate to their share of overall liability might be willing to challenge the allocation. This latter situation is not addressed by the allocation factors, and may produce a considerable number of disputes.