Mega-Party Superfund Negotiations

George H. Pain

Mr. Pain is Associate Counsel with Olin Chemicals Group.He has been involved in negotiations on five Superfund sites.

Many environmental lawyers have recently experienced the emergence of a new type of prelitigation negotiation, involving hundreds of potential corporate defendants arrayed on one side against the combined resources of federal, state, and, perhaps, local governments. The issue in dispute is who shall pay how much to clean up hazardous waste disposal sites. The statutory impetus for the discussions comes from the Comprehensive Environmental Response, Compensation, and Liability Act¹ (CERCLA) commonly referred to as Superfund. The scale of these negotiations is illustrated by the fact that the federal government has identified 280 potential defendants in the Chem-Dyne, Hamilton, Ohio Superfund matter and 430 in the Seymour Recycling Company, Seymour, Indiana matter. This new category of environmental dispute resolution may be referred to as "mega-party Superfund negotiations."

The intitial experience with mega-party Superfund negotiations has been instructive. The format and procedures pose unusual problems for the attorneys involved, and care must be exercised if one is to minimize the impacts of those problems on one's client. Moreover, there are fundamental flaws in the system as it now operates, flaws which might be significantly remedied by use of new dispute resolution techniques developed in other areas of the law.

The Comprehensive Environmental Response, Compensation, and Liability Act, among other things, imposes liability on three classes of persons for costs incurred by the government and others in cleaning up certain hazardous waste disposal sites. Generally, the owners and operators of the site and certain transporters and generators of the waste it contains are potentially responsible for such costs. The government and others maintain that such persons are jointly, severally, and strictly liable under Superfund. Therefore, at any given Superfund site, there may be hundreds of potentially responsible parties (PRPs), each of which is arguably liable for the total cost of clean-up of a site under a strict reading of Superfund.

Typically, a Superfund matter begins with the federal government sending "notification letters" to all parties it believes may be responsible for adverse environmental and health conditions existing at a hazardous waste site. The letter usually requests the recipient to disclose the extent of its willingness voluntarily to clean up the site. Depending on the particular situation, the letter is signed by the Environmental Protection Agency (EPA), the Department of Justice (DOJ), the state Office of Attorney General, and/or the state environmental protection agency. The typical response to a Superfund notification letter is a statement by the recipient that the matter, including the extent of contribution, is under study, and it is willing to discuss the matter with the government. A meeting is often scheduled by the lead agency to discuss the perceived problems at the site and to determine whether any or all of the PRPs are willing to clean up the site voluntarily. It is at these initial meetings, likely to be attended by hundreds of lawyers, that the scope of the legal and logistical problems arising from the hazardous waste disposal site first become apparent.

Once the negotiations are thus joined, the federal government tends to try to move them along in an effort to reach settlement expeditiously. Often, the EPA enforcement attorneys stress that the Superfund office is on a "dual track" with the enforcement office; which in a practical sense means that if Superfund cleanup monies are expended on the site before negotiations are concluded, the enforcement branch will file suit against the PRPs for reimbursement. In practice, however, the deadlines are often moved back substantially, provided the government feels that negotiations are progressing satisfactorily. Nevertheless, to avoid problems, a lawyer representing a Superfund PRP should plan ahead early in the negotiation process.

Selection of Counsel

In mega-party Superfund matters, it is prudent to retain outside counsel in the appropriate jurisdiction at an early date. This is true even if the PRP is relatively certain that it will be able to negotiate a settlement before a law suit is commenced. If negotiations fall through, it may be difficult to secure capable local counsel to defend the PRP's interests, for the demand for such service will be great and there will be a substantial chance of conflicts of interest within the same law firm. Therefore, it is wise for a PRP to retain local counsel upon the receipt of a notice letter.

In some situations, it makes good sense for a group of PRPs with identical interests on a specific issue to use one lawyer to represent the group on that particular issue. For example, if non-settling PRPs attack a group settlement by arguing that the group collectively did not pay its "fair share" (see "Post-Settlement Risks," below), the settling PRPs may be wise to retain a single attorney for the limited purpose of defending the settlement on that issue.

Group Involvement

A group of PRPs may decide to join together in a collective effort to gather information about the Superfund site, exchange ideas, and initiate negotiations with the government. A group of PRPs may caucus at the initial meeting or shortly thereafter to determine whether an industry group should be formed to address the issue collectively. During this caucus, it becomes evident that the PRPs have diverse factual situations and divergent ideas about the appropriate manner in which to proceed. However, a group of parties which have similar interest may, nonetheless, decide to negotiate as a group. Generally, the formation of an industry group is a good idea in that it takes advantage of certain economies of scale and increases the PRP's bargaining power.

In mega-party Superfund negotiations, the government may select a "first tier" of the "more responsible parties" (e.g., higher volume generators) in order to facilitate negotiations. For example, in the Chem-Dyne Superfund matter the 280 PRPs were divided into two tiers of 30 and 250 PRPs.

[12 ELR 15055]

The question of whether to become involved in a settlement group is particularly difficult for small volume generators. Group negotiation in such matters is potentially frustrating experience in which the stakes are high, the technical complexity of the issues excruciating, and basic information lacking or sketchy at best. Moreover, it appears that the larger volume generators pay less and the lower volume generators pay more than their potential liability based on a straight percentage volume of waste apportionment. First, a minimum financial contribution typically is imposed on all generators, either by government or the industry group, which may increase the small volume generator's payment. Second, and more important, the largest volume generators may prefer to litigate rather than agree to the high payment attributable to their percentage contribution of waste volume. Nevertheless, there are strong reasons that smaller volume generators should participate in a group settlement effort. There is a stronger incentive for small volume generators to settle, because their settlement cost is likely to be relatively small and costs associated with litigating or continuing long-term negotiations are likely to be substantial. A group of PRPs is likely to negotiate a more favorable settlement agreement than a single small volume generator. The government may simply choose not to negotiate with individual PRPs at the same time it is negotiating with a group of PRPs, thereby increasing the chances of suit being filed against PRPs not participating in the group settlement effort. This appears to have occurred in the Chem-Dyne Superfund matter in which a group settlement was announced at the same time a lawsuit was filed against many of the PRPs which did not enter into the group settlement.

Information

Information concerning the relative contribution of waste to the site is often the most important information for mega-party negotiations. Unfortunately, it is difficult to acquire such information in a timely fashion in many cases. The most efficient method in which to proceed may be a voluntary exchange of shipping documents between the government and the PRPs. Establishing credibility and responsibility with the government personnel during this exchange can be a key to successful resolution of the matter.

While extremely beneficial in analyzing legal liabilities and long-term litigation strategies, the acquisition and application of more complex, company-specific information (other than shipping records) is less important for mega-party Superfund negotiation purposes. Even if such information is available, it is often hard to translate the information into acceptable apportionments of liability in a mega-party Superfund settlement context (see "Settlement Exposure," below). Furthermore, it is risky to rely on any current interpretation of legal liability, due to the lack of judicial interpretations on important Superfund issues, including the appropriateness of joint, several, and strict liability.

In some instances, the government may lack the basic information necessary to establish the extent of a problem at a site and to accurately identify the PRPs. In such a case the government's first step may be a request for a PRP-financed study of the extent of adverse environmental conditions at the site and information concerning the PRPs' contribution thereto. Some PRPs have strongly resisted such actions.

Many companies have attempted to secure government information concerning the site by making a Freedom of Information Act (FOIA) request. However, such FOIA requests are often not helpful since the government refuses to disclose much information by arguing that disclosure would have an adverse effect on enforcement. Furthermore, some companies may want to carefully consider whether such data should be made public.

Settlement Exposure

It is often said that the three factors most important in property valuation are "location, location, and location." Similarly, in evaluating Superfund settlement exposure, it appears to be true that the three most important factors are "volume, volume, and volume." In recent settlements and current settlement negotiations involving numerous generators, the percent of waste volume contributed by the individual PRP is the most important and often exclusive criterion in determining the PRPs' "fair share" settlement contribution. For example, the government recently held a series of meetings for the 420 PRPs involved in the Seymour matter at which a settlement offer was made based solely on the volume of the individual PRPs' wastes shipped to the site.Basically, a Seymour PRP was to make a cash settlement offer equal to the product of its percentage contribution of waste volume to the site and the total site clean-up costs.

It is frustrating to PRPs that the following factors, althoughimportant in a litigation exposure evaluation, have not yet played a major role in determining relative exposure in a mega-party negotiated settlement:

1. The extent and cost of any voluntary cleanup efforts before the settlement:

2. The degree of negligence, if any, in sending waste to a specific site;

3. The time period in which materials were sent to the site (i.e., the site may have been operated properly during an earlier time period in which a specific PRP may have sent waste to the site);

4. The relative toxicity of the waste sent to the site; and

5. The nexus between the waste sent to the site by a particular PRP and the actual or threatened release of contaminants and their effect on groundwater and soil. Such factors have not been accounted for in mega-party negotiated settlements. They obviously will be important in any judicial determination and apportionment of liability.

Furthermore, the government largely bases the decision whether to settle Superfund matters with a group of PRPs on two criteria, one of which is percent volume.First, the percentage of total cleanup cost represented by the collective settlement offer must be roughly equal to or greater than the percentage of waste volume represented by the settling parties. Second, enough "deep pockets" must remain in the non-settling group to ensure that subsequent judicial determinations of liability will be collectible and sufficient to complete the cleanup.

Given the bias towards apportionment on a percentage volume basis, the cost of cleanup estimate which is proffered by the government at the start of negotiations is an extremely important variable. The initial cleanup cost estimate by the government is on the high side for obvious purposes. Therefore, if a settlement is being negotiated based upon a percent of waste volume apportionment, it may be wise for the PRPs to finance a study to accurately [12 ELR 15056] compute the cost of cleanup before committing specific dollar amounts to a settlement.

Because settlement exposure is largely determined by the rather crude measure of the PRPs' share of the waste volume shipped to the site, the ease with which a settlement can be reached depends to a significant degree on exactly who the government has brought into the negotiations through its notification letters. The inclusion of parties that are not in fact responsible for hazardous wastes at the site or whose hazardous waste contribution was a small portion of their total waste may adversely affect the prospects for an expeditious group settlement. Because the settlement negotiations are likely to be based on percent volume or a pro rata share, such parties will resist settlement. This may be the case in the Fields Brook Superfund matter in which many of the companies included do not feel that they are responsible for the alleged hazardous waste problem, and have resisted a settlement based on a pro rata apportionment. Furthermore, the other parties are likely to resist a settlement in which those arguing that their waste volume is not a fair measure of their contribution are let off the hook. Conversely, there is a strong incentive for identified PRPs to ensure that all responsible parties be identified prior to settlement in order to facilitate cost sharing.

Post-Settlement Risks

In negotiating a mega-party Superfund agreement, several issues which may not arise until after the settlement appear to be the most vexing, judging by the intitial settlement negotiations. These include protection from third-party contribution actions, liability for natural resource damages, and costs associated with "split suit" litigation.

Non-settling PRPs may well seek to add the settling PRPs in any lawsuit instituted by the government, or may institute a suit for contribution. There are ways to structure the settlement agreement to minimize the risk and impact of such actions. The agreement should incorporate all the elements of an applicable state statute, if any, protecting joint tortfeasors who have settled from further liability. For example, Ohio has a strong statute dealing with contribution by tortfeasors.² This should allow a settling party to remove itself quickly and inexpensively from a suit for contribution by the means of a motion to dismiss or for summary judgment. Another protective device is a government "indemnity provision" whereby the government agrees to reimburse, offset, or reduce future claims by the government in the event of a judicial determination that additional liability remains.³ This mechanism will insure that the settling parties will not have to pay more than the settlement amount, but may not totally avoid litigation costs.

Protection from liability for natural resource damage is also an issue meriting consideration. For example, since the Department of the Interior (DOI) is the federal trustee of natural resources, a settlement document signed by the DOJ expressly on the behalf of EPA only will not be sufficient to settle the natural resource damage issue. DOI could still assert a claim against the settling parties. In the Chem-Dyne settlement, DOJ was unwilling to sign on the behalf of all United States agencies, including the DOI, and, in fact, expressly excluded natural resource damage claims from the settlement. This position may, of course, change in the future. In reality, however, such potential claims by DOI will probably not be asserted.

If the settlement is based on a partial release from liability, it is important for the settling PRPs to seek protection from being brought into a lawsuit earlier than anticipated. For example, if a company settles for surface cleanup issues one day and a groundwater contamination suit is instituted by the government the next day, the company's litigation costs will probably be as large as if it had defended on both issues. If the prospect of large litigation costs was the most important factor in inducing the company to settle, the value of a settlement without such protection obviously diminishes. A provision in a settlement agreement whereby the government agrees to delay suit on groundwater contamination for a specific time period, absent the manifestation of an imminent and substantial endangerment, may offer some protection from such a risk.

Alternative Negotiation Approach

The above discussion illustrates the complexity and potential problems of mega-party Superfund negotiations. Since this type of negotiation is still new, both the government and the PRPs have an ideal opportunity to develop innovative approaches to effect fair and equitable settlements. For example, settlements based solely on percentage waste volume are obviously inequitable to many PRPs. Short ofburdensome, expensive, and lengthy litigation, however, there are few alternatives that will take into account other important factors. One better approach may be a "mini-trial." An arbitrator is selected through a consensus of the participating parties to preside over the mini-trial. During the course of several days, each party is given a limited amount of time to present its "best case." At the end of the mini-trial, the participants negotiate and attempt to formulate an equitable settlement based upon the evidence. A non-binding recommendation is made by the arbitrator concerning the extent of the liability of each of the parties. It is essential that not only the lawyers, but also management decision-makers participate in the mini-trial in order to make possible the flexibility needed to quickly reach a compromise position among the PRPs on relative liability and ultimate resolution of the matter.

Thus far, the mini-trial concept has been used only in conventional two- or three-party negotiations. Obviously there are some problems in applying the mini-trial concept to mega-party matters. Shortness of time and the large number of necessary participants (even if the group is divided into more than one tier, each with its own mini-trial) are obvious stumbling blocks. Nevertheless, a mini-trial could make it possible to develop a settlement package, based on more information than percentage share of the waste volume at the site. Hopefully, participants in mega-party superfund negotiations will be able to develop and implement innovative approaches to effect fair and equitable settlements without resort to costly, time-consuming, litigation. A mini-trial format may be a procedure worth consideration.

1. 42 U.S.C. § 9601 et seq., ELR STAT. & REG. 41941.

2. OHIO REV. CODE ANN. § 2307.32.

3. The protective provisions in the Chem-Dyne Settlement Agreement might serve as a preliminary model, although improvements could be made in them. See 12 ELR 30027.