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Third Circuit Addresses Scope of 'Arranger' Liability Under CERCLA: Mere Ownership or Possession of Hazardous Substances is Insufficient



March 8, 2004

In enacting the Comprehensive Environmental Response, Compensation, and Liability Act (“CERCLA”) in 1980, Congress took a number of steps to ensure that uncontrolled hazardous waste sites would be cleaned up, and that those responsible for the contamination would be forced to pay for those cleanups. In addition to giving the government authority to conduct and order cleanups, and creating a “Superfund” to provide monies for government cleanups, the statute, in section 107(a), makes several broad categories of persons — both individuals and business entities — liable to the federal government, State governments, and even private parties for the cost of cleanups. Former and current owners and operators of waste sites, and those who transported wastes to such sites, are among those covered by section 107(a). See 42 U.S.C. Section 9607(a).

The most diverse and most vexing category of potentially responsible parties, however, covers any person who, in the words of the section 107(a)(3), “by contract, agreement, or otherwise arranged for disposal or treatment . . . of hazardous substances owned or possessed by such person, by any other party . . . at any facility.” 42 U.S.C. Section 9607(a)(3). The provision clearly covers, for example, typical generators of waste — companies that send waste chemicals to a landfill. But what about other relationships? Can a company, for example, “arrange for disposal” of chemicals without intending any disposal at all, such as by sending useful chemicals to a facility for processing that results in spills of some of those chemicals? How far does “arranger” liability extend?

For well over a decade federal circuit courts have struggled with these questions. In United States v. Aceto Agricultural Chemicals Corp., 872 F.2d 1373 (8th Cir. 1989), the first case to enunciate a broad view of arranger liability, the Eighth Circuit held that a pesticide manufacturer that sent technical grade pesticides to another firm’s facility for processing into commercial grade pesticides could be held liable under Section 107(a)(3). The court cited the manufacturer’s ownership of both the raw material and the finished product and the fact that the generation of pesticide-containing wastes was an inherent part of the formulation process as important factors supporting its finding of potential liability. Id. at 1381-82.

Since Aceto, a number of other circuit courts have addressed the scope of arranger liability. In contrast to the expansive approach of Aceto, some courts require a showing of a specific intent to dispose. See, e.g., Amcast Industrial Corp. v. Detrex Corp., 2 F.3d 746, 751 (7th Cir. 1993). Other cases focus on the element of ownership and on facts that put the putative arranger on notice that spills will occur. See, e.g., Jones-Hamilton Co. v. Beazer Materials & Services, Inc., 973 F.2d 688, 691-94 (9th Cir. 1992). Still others instruct courts to consider the totality of the circumstances, inviting them to weigh any and all relevant factors. See, e.g., South Florida Water Management District v. Montalvo, 84 F.3d 402, 407 (11th Cir. 1996).

Twice during the 1990s the Third Circuit alluded to the issues raised by Aceto without finding it necessary to decide them. See United States v. Occidental Chemical Corp., 200 F.3d 143, 145 n.1 (3d Cir. 1999); FMC Corp. v. United States Dep’t of Commerce, 29 F.3d 833, 845-46 (3d Cir. 1994), superseding and vacating 10 F.3d 987 (3d Cir. 1993). (The panel opinion in FMC, which was later withdrawn, had adopted the Aceto standard, but the superseding en banc opinion affirmed the district court’s holding on arranger liability without discussion because the court was equally divided on that point. 29 F.3d at 846.) This left district courts in the circuit without authoritative guidance as to the breadth of the arranger category. In Morton International, Inc. v. A.E. Staley Manufacturing Co., 343 F.3d 669 (3d Cir. 2003), decided on September 16, 2003, the Third Circuit sought to fill this gap, responding to a request from the district court to “definitively address” the scope of arranger liability under Section 107(a)(3). Id. at 675. The opinion clarified some questions about how a plaintiff can prove arranger liability, but left other questions unanswered.

The case involved the now-famous Ventron/Velsicol site in Wood Ridge, New Jersey. Between 1929 and 1974, various companies produced mercury-containing compounds at the site. The compounds were sometimes produced for customers from “virgin mercury” that had been provided by those customers. Some customers also sent “dirty mercury” to the site, to be cleaned to remove contaminants before being used in the production process, with the finished products returned to the customer. Operations at the site released harmful waste in the environment for decades. In previous litigation and administrative actions, Morton International, Inc. (“Morton”) and other companies were held liable for the cost of cleaning up the site.

Morton sought to recoup some of its cleanup costs by way of a 1996 lawsuit under section 113(f) of CERCLA, which allows parties that must pay for site cleanups at CERCLA-covered facilities to seek contribution from “any other person who is liable or potentially liable under section 107(a).” 42 U.S.C. Section 9613(f). (Morton also asserted claims under the Resource Conservation and Recovery Act (“RCRA”), the New Jersey Spill Compensation and Control Act (“Spill Act”) and common law. ) Morton alleged that numerous defendants, including Tennessee Gas Pipeline Company (“Tenneco”), were liable as arrangers because of various “tolling” or “conversion” agreements whereby the plant processed a customer’s virgin mercury into finished products, and similar processing agreements involving dirty mercury. Tenneco admitted that it purchased mercury compounds from the site, but the parties disagreed as to the nature of the transactions between Tenneco and the plant, whether Tenneco had knowledge of waste disposal at the plant, and whether Tenneco shipped dirty mercury to the plant for processing. Tenneco was granted summary judgment on Morton’s RCRA claim, but failed to win summary judgment on the other claims. On a renewed motion, however, Tenneco was granted summary judgment on Morton’s CERCLA contribution claim, and on Morton’s Spill Act and common law claims. Morton appealed.

In the absence of a statutory definition of “arranged for” and getting little help from the dictionary definition of the term, the court first looked to other portions of section 107(a)(3). It concluded that the inclusion of the phrase “or otherwise” after “by contract [or] agreement” indicated an intent on the part of Congress that the arranger category be broadly construed. Morton, 343 F.3d at 676. The court buttressed this conclusion by citing, as courts often do, the broad remedial purposes of the statute. Id. One can argue, however, that Congress added “or otherwise” to Section 107(a)(3) simply to make clear that contracts and agreements should not be considered the only ways of “arranging for disposal,” without eliminating the requirement that the party in question actually “arranged for disposal.” Saying that there may be other ways besides contracts and agreements to “arrange for disposal” is not the same as saying that the term “arranged for” itself should be read so expansively as to include tolling agreements.

The court then looked to the decisions of other circuits on the scope of arranger liability, and concluded they are “virtually unanimous” on two points: the determination of arranger liability is a “fact-sensitive inquiry that requires a multi-factor analysis,” and courts must look beyond the defendant’s characterization of a transaction to decide whether it really was an arrangement for disposal or treatment. “We absolutely agree with both of these points,” the court noted. Id. at 677. However, the court continued, courts have disagreed as to which factors must be considered, whether a given fact, such as intent, must be proven, and the relative weight to be given to various factors. Id.

The court’s resolution of the issue elevates certain factors above others, but does not exclude other factors that may be relevant in a given case. The “most important” factors are “(1) ownership or possession; and (2) knowledge; or (3) control.” Id. at 677. Specifically, based on the language of the statute, which imposes liability on those who arranged for disposal or treatment of hazardous substances “owned or possessed by such person,” 42 U.S.C. Section 9607(a)(3), “[o]wnership or possession of the hazardous substance must be demonstrated, but this factor alone will not suffice to establish liability.” Morton, 343 F.3d at 677. In addition to ownership or possession, the plaintiff “must also demonstrate either control over the process that results in a release of hazardous waste or knowledge that such a release will occur during the process.” Id. (emphasis in original). The knowledge required as an alternative element of the second prong of the court’s test may be either actual knowledge, as when an agreement specifically contemplates spillage as an inherent part of the process, or presumed knowledge, as when the defendant is familiar with industry custom, under which the process in question normally results in the release of harmful wastes. Id. at 678-79. In contrast, the control required as the other alternative element of the court’s second prong appears to be actual control, rather than simply authority to control. Id. at 679.

Even as it appeared to announce a bright-line rule for arranger liability, however, the court diminished the clarity of that rule by noting that it identified ownership or possession plus knowledge or control as the “principal factors” under section 107(a)(3) in order to “establish the base-line for analysis of ‘arranger liability’ in this Circuit.” Id. “It is certainly possible,” the court continued,” that other factors could be relevant to this analysis in a given case, and we encourage consideration of those as well.” Id.

The court also added a sort of equitable gloss to its analysis that suggested, in contrast to the language of the statute, that the determination of arranger liability in a given case may vary depending on whether the action is a so-called “direct” cost recovery action under section 107 or a contribution action under section 113(f). In contrast to section 107(a), which has been construed as providing for joint and several liability, section 113(f) allows a court in resolving a contribution action to “allocate response costs among liable parties using such equitable factors as the court determines are appropriate.” 42 U.S.C. Section 9613(f). The Morton court may have confused the issues of liability and allocation when it reminded district courts that in determining arranger liability they “should not lose sight of the ultimate purpose of Section 113, which is to determine whether a defendant was sufficiently responsible for hazardous-waste contamination so that it can fairly be forced to contribute to the costs of cleanup.” Id. at 678 (emphasis supplied). Section 113(f) refers simply to persons “liable or potentially liable under section 107(a),” see 42 U.S.C. Section 9613(f), and section 107(a)(3) makes no distinction between defendants in cost recovery actions and defendants in contribution actions. See 42 U.S.C. Section 9607.

Thus, by reading the liability provisions of section 107(a)(3) as somehow incorporating the equitable considerations that courts may use in allocating cleanup costs among liable parties in contribution actions, see 42 U.S.C. Section 9613(f), the court introduced some unnecessary confusion into its analysis. That same confusion infected the court’s discussion of just which factors, besides those it specifically identified, might be considered in a given case. Citing the Eleventh Circuit’s opinion in Concrete Sales and Services, Inc. v. Blue Bird Body Co., 211 F.3d 1333, 1336-37 (11th Cir. 2000), the court listed, as potentially relevant factors, whether the transaction involved transfer of a “useful” or “waste” product, whether the defendant intended to dispose of a substance at the time of the transaction, whether the defendant made the “crucial decision” to place the substance in the hands of a particular facility, whether the party had knowledge of the disposal, and whether the party owned the material. Morton, 343 F.3d at 677 n.5. “Depending on the particular circumstances of a case,” the court explained, “any of these factors, and quite possibly others not mentioned here, could be helpful in determining whether the defendant was sufficiently responsible for hazardous-waste contamination so that it can fairly be forced to contribute to the costs of cleanup. We think, though, that the factors we have identified – ownership or possession, knowledge, and control – are closely related to most or all of the other factors identified.” Id.

With its opinion in Morton, the Third Circuit has joined other circuits in embracing an expansive view of arranger liability that does not require an intent to dispose in order for liability to attach. In a given case, this can greatly enlarge the class of potentially responsible parties. CERCLA litigants need to be aware of this possibility, and of the evidence they need to develop in order to make a case against non-traditional arrangers. At a given facility, whether or not “intentional” disposal occurred, many companies that simply sent chemicals to the site for processing might be liable as arrangers. CERCLA plaintiffs (in cost recovery actions) or third-party plaintiffs (in contribution actions) who wish to recoup cleanup costs from such companies must design discovery strategies that will elicit the kind of evidence they will need; proving arranger liability in a Morton-type case will require evidence quite different from that which would have sufficed in a typical landfill case. Tolling agreements, conversion agreements, and other contractual documents, for example, may establish that a customer retained ownership of the chemicals throughout the process. Key witnesses may include both high corporate officials and lower-level employees whose testimony can prove that the customer company knew that spills were likely to occur or had actual control over the process. More generally, witnesses who can testify about general industry practices can provide evidence about knowledge that the customer company had, or can be presumed to have had, about the likelihood of spills.

Ultimately, Morton sends a muddled message to CERCLA litigants in the Third Circuit. On one hand, it explicitly requires proof of (1) ownership or possession, plus (2) knowledge or (3) control for arranger liability under section 107(a)(3) to attach. On the other hand, it instructs courts — at least in contribution actions — to weigh the fairness of imposing arranger liability on a given defendant. Finally, it encourages courts — especially in contribution actions, and apparently in cost recovery actions as well — to consider, besides those factors it specifically identified as required elements of arranger liability, any number of additional relevant factors. The result is an ostensibly bright-line test whose application in any given case may be affected by a host of unpredictable equitable considerations.