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ESG (Environmental, Social & Governance)
M&A, Real Estate and Other Transactions
Regulatory Compliance and Product Stewardship
EPA’s Proposed Designation of PFOS and PFOA as CERCLA Hazardous Substances – A K&S Roundtable
On August 26, 2022, the U.S. Environmental Protection Agency released its proposed designation of the two most well-known PFAS compounds – perfluorooctanoic acid (PFOA) and perfluorooctane sulfonate (PFOS) – as hazardous substances under CERCLA. Various viewpoints on the proposal suggest that while the direct consequences of the designation may be limited in scope, the indirect implications are far more significant and expand beyond a “mere” regulatory change. To explore these wider implications, King & Spalding’s Chemical Currents team reached out to colleagues across the firm to solicit their thoughts on two questions: (1) From your practice perspective, what are the potential implications of EPA’s proposed designation, and (2) Although the designation may not be final for up to a year, what are steps companies should consider taking to prepare for those implications.
This special edition provides the insights from our roundtable discussion. As we have, we think you will see several common threads throughout the individual sections.
Environmental Justice
Michael Leslie
The proposed EPA rule designating PFOA and PFOS as hazardous substances under CERCLA has significant implications for Potentially Responsible Parties (PRPs) at both current and closed Superfund sites, as well as for companies involved in Brownfields1“Brownfields” sites are those with a previous history of contamination and remediation under agency oversight that have received—or are close to receiving—regulatory closure from the oversight agency. Such regulatory closures are often made under a “commercial and industrial” risk standard that leaves some contaminants if they are below human health risk standards for the specified use. These sites are often attractive to developers who intend to convert otherwise vacant properties to productive use. redevelopment and land acquisition. The focus on environmental justice (EJ) by EPA and other federal agencies will increase agency scrutiny of sites where PFAS compounds have been detected in soil or groundwater and will empower nearby EJ communities to advocate for increased monitoring, lower clean-up standards, and even to reopen closed sites.
For open sites undergoing environmental investigation and remediation, the agencies can be expected to add PFOA and PFOS to the list of compounds to be investigated and remediated, and EJ groups can be expected to advocate strongly for them to do so. Given the ubiquitous nature of these compounds in the environment, the extremely low action levels being proposed, and the difficulty and expense of remediation for these compounds, companies can expect the scope of investigation and remediation costs to increase substantially. This, in turn, is likely to increase the stakes for contribution litigation, as well as the number of parties involved, given the many uses of PFAS compounds in a wide variety of industries and products. Since toxic tort suits often follow, the tort exposure of site PRPs and defendants in contribution litigation is likely to expand, especially given the adverse publicity of PFAS and the rise of EJ as a theme of such suits and as a recruiting tool for plaintiffs.
With respect to sites that have received regulatory closure, contribution protection in consent decrees or CERCLA settlements may not cover PFOS and PFOA. As a result, state or federal agencies could exercise reopeners at settled sites under a consent decree or could prompt a new round of agency investigation and oversight to include PFOA and PFOS. EJ groups could advocate for reopening those sites to investigate PFOS and PFOA, and to change the risk-based remedial standards that led to a site closure decision by the agencies. Current property owners, real estate entities seeking to purchase Brownfield sites for redevelopment, and past owners/operators who got regulatory closure could all be exposed to new liability (and new hurdles in the permitting process) as a result of the inclusion of PFAS compounds as hazardous substances. This will likely lead to heavy scrutiny of the scope and limitations of site closure decisions and any reopeners in agency consent decrees, as well as the releases, indemnities, and representations and warranties in settlements and property acquisition agreements. These issues highlight the need for increased due diligence in transactions with a real estate component, and a new focus on properly drafted language in settlements, consent decrees and acquisition agreements to protect against this exposure.
Environmental, Social & Governance (ESG)
Elizabeth Morgan and Joe Eisert
Pressures from investors and other stakeholders, the wide range of ESG interests and issues, and the fluid nature of ESG can be overwhelming. The proposed rule serves as a reminder that companies should not overlook traditional environmental regulatory developments and their potential impacts when considering ESG risks. When evaluating material ESG risks under a financial materiality analysis (or otherwise), a company should consider these regulatory developments. CERCLA actions can be lengthy and costly, and frequently financially material. Delays or additional restrictions in permitting can have similar consequences. Companies should consider whether new risks resulting from the proposed rule are excluded from environmental insurance policies. In addition, public companies and other companies engaged in ESG reporting should consider disclosures in SEC filings and sustainability reports through the lens of the proposed rule, particularly in the context of disclosures of material ESG risks. Such companies also should consider the scope and impact of the proposed rule before making any statements or commitments about actions they will take to address PFOA and PFOS risks. In the transactional context, financial institutions acting as lenders or underwriters, as well as companies engaging in M&A activity (as discussed in more detail below), should consider appropriate due diligence to identify the scope of potential risk around the proposed rule.
M&A, Real Estate and Other Transactions
Kristyn Dunn and Nick Venetz
While sophisticated transaction parties have been aware for some time of the need to evaluate potential liabilities associated with PFAS compounds, EPA’s proposal to designate PFOS and PFOA as hazardous substances under CERCLA will heighten that focus and likely change the dynamic between sellers and buyers where potential or actual PFAS liabilities exist.
Potential exposure to PFAS liabilities will become a heightened diligence item and any potential or known liability is likely to impact transaction terms. Sellers of any property or business that has potential PFAS contamination are likely to be well served by completing a Phase I Environmental Site (and otherwise assessing potential PFAS liabilities) before commencing a sales process. To the extent potential liabilities are identified, a seller and its counsel can then determine whether to put forth a constructive solution and proceed with the sales process (recognizing this will be a point of negotiation with any buyer) or complete further testing and potentially remediation before doing so (delaying the sales process, but potentially resolving what could otherwise become a contentious issue, or even a “deal killer” before going to the market). Absent proactive handling of this exposure point, a sophisticated buyer will likely require completion of a Phase 1 and not proceed with consummation of a transaction without completion of extensive diligence on the point, and likely will require a clean Phase 1. Non-recourse transactions which utilize representations and warranties insurance will be impacted, as well, because claims for losses arising out of exposure to (or the existence of) PFAS substances are standard exclusions to any representations and warranties policy (and known liabilities of any kind are excluded). We think that designation of PFOS and PFOA as hazardous substances under CERCLA will increase the likelihood of special indemnities where there are potential or actual PFAS liabilities. Transaction parties that find themselves in such a situation will need to consult with qualified legal and technical counsel to navigate the issue and potential avenues to resolution.
Sellers must be cautious about scope of diligence. Designation of PFOS and PFOA as CERCLA hazardous substances will bring these substances within the scope of “recognized environmental conditions” (RECs) for Phase 1 Environmental Site Assessments, and identification of any such REC (or identification of actual or potential PFAS contamination through other means) is likely to result in a need to conduct invasive sampling and testing (e.g., a Phase II Environmental Site Assessment). However, if a seller agrees to conduct or allows a prospective buyer to conduct a Phase II ESA to further assess identified potential PFAS contamination, the seller (as the party responsible for the property or operations in questions) is responsible for the result of such assessments, which may include notifications to governmental authorities and potential agency action and remediation. Sellers and buyers will both need to carefully consider how the result of the assessment will impact a seller’s indemnification obligations and a buyer’s obligation to close. Further, as discussed below, a seller may remain exposed to contributory cleanup costs beyond its indemnification obligations even if the transaction closes.
Sellers may be faced with extra- and post-contractual liabilities. It is common practice for buyers and sellers to agree to disclaimers of extra-contractual representations, limit recourse to an express indemnity, and further limit that indemnity through survival periods and monetary caps. In the case of a non-recourse transaction with representations and warranties insurance, such limitations are typically even more protective of the seller, providing only that the seller’s representations do not survive the closing (except in the case of fraud) and that the buyer shall have no recourse to the seller for breach of the seller’s representations (except in the case of fraud). Sophisticated sellers may also seek to obtain a broad release from the buyer as to any and all claims, losses, damages, etc. arising out of or relating to the property or business the buyer is acquiring, except as expressly provided for (and limited to) the indemnity in the purchase agreement. However, CERCLA allows parties conducting cleanup activities to seek contribution from former owners of properties or operations with PFAS impacts. A CERCLA claim for contribution is not premised on a contractual breach and is instead a statutorily mandated cost-sharing regime. As such, disclaimers of extra-contractual representations and attempts to limit a seller’s post-closing liability will not be an effective defense to a CERCLA claim for contribution. We think it is likely that a broad release coupled with an appropriate indemnity (depending on how broadly it is structured and its exact language), would operate to waive a buyer’s claim even under CERCLA for post-closing contribution by a seller for cleanup costs and provide the seller with a defense in any action brought by agencies or other PRPs under CERCLA.
Sellers of real property will be directly impacted. Sellers of real property will need to closely examine the definitions of terms such as “environmental laws”, “hazardous materials” and “hazardous substances” in agreements to determine whether or not CERCLA and PFOS and/or PFOA are implicated. Additionally, a seller may seek to carve out PFOS and PFOA from the representations and warranties made by the seller regarding environmental conditions, or avoid making any representations related to environmental conditions, since it is likely that PFOS and/or PFOA are present at some level in many properties and a seller may not be able to make a blanket representation that it has no knowledge of hazardous materials on the property2
40 CFR Part 302, [EPA-HQ-OLEM-2019-0341; FRL-7204-02-OLEM] at 36 “a significant body of scientific evidence shows that PFOA and PFOS are persistent and mobile in the environment”
“PFOA and PFOS are common contaminants in the environment because of their release into the environment since the 1940s and their resistance to degradation”
“In addition to being found in groundwater, surface water, soil, sediment, and air, they have been found in wild and domestic animals such as fish, shellfish, alligators, deer and avian eggs; and in humans”
. In the cases where sellers do not provide adequate representations and warranties regarding the environmental condition of a property, a buyer will need to rely on its own environmental diligence, similar to the manner in which parties rely on title searches and/or title insurance. Sellers must also be aware of statutory requirements that are triggered by PFAS and PFOA being designated as hazardous substances under CERCLA, for example:
- The sale of all federally owned property must comply with CERCLA requirements related to PFOS and/or PFOA. When federal agencies sell or transfer real property, a notice of the presence of hazardous substances is required in certain circumstances under Section 120(h) of CERCLA. Furthermore, in certain circumstances, Section 120(h) of CERCLA requires federal agencies to provide a covenant warranting that “all remedial action necessary to protect human health and the environment with respect to any [hazardous substances] remaining on the property has been taken before the date of such transfer, and any additional remedial action found to be necessary after the date of such transfer shall be conducted by the United States.”
- State property transfer laws and regulations, such as:
- Connecticut’s Property Transfer Program.
- Michigan’s Baseline Environmental Assessment Program.
- New Jersey’s Industrial Site Recovery Act (New Jersey has already included PFOS and PFOA prior to their designation as hazardous substances under CERCLA).
A seller should consult with qualified counsel familiar with the local jurisdiction to determine the specific requirements applicable to its property transfer.
Litigation
John Ewald and Kevin Hynes
From a litigation perspective, designating PFOA and PFOS as CERCLA hazardous substances will have a substantial impact on future litigation. Currently, EPA’s Chemical Data Reporting (CDR) rule under the Toxic Substance Control Act (TSCA) only requires that manufacturers report use of PFOA and PFOS above a 2,500 pound threshold at an individual site, while Toxic Release Inventory (TRI) reporting requirements currently require reporting for annual releases over 100 pounds for PFOA and PFOS. EPA’s proposed rule, by contrast, would require reporting for every single release of PFOA or PFOS above a one pound threshold over a 24-hour period. This dramatically lower reporting requirement will generate an incredible amount of data regarding nearly each and every low level release of PFOA and PFOS at individual sites within the U.S. These publicly available reports on each and every potential low level release of these chemicals will create a roadmap for civil litigation.
As one example, litigation concerning reduced property value due to PFOA and PFOS releases has existed for years. However, with the identification of a large number of additional facilities that may have released low levels of PFOA and PFOS into the area surrounding the site at issue, there will be new potential targets for other property owners to seek recovery for potential lost property value.
As another example, numerous medical monitoring class action cases have been filed alleging community exposures to PFOA and PFOS through environmental releases from large manufacturers. The new reporting requirements could potentially identify additional new defendants that may have contributed, at extremely low levels, to potential exposures to PFOA and PFOS in a proposed class. Such cases carry significant risks and costs that these potential new defendants may not presently anticipate.
Additionally, these low reporting thresholds may identify manufacturers and products that have not exceeded any of the current reporting requirements to date. This low level reporting will potentially identify new potential manufacturers and products that may contain extremely low levels of PFOA or PFOS, and provide a roadmap to consumer product litigation that, until now, had not been reasonably anticipated.
First and foremost, clients need to assess their operations to determine whether, and to what extent, their facilities may be subject to these new low level reporting requirements. They should also assess whether it would be possible to modify existing operations or raw materials in order to reduce or eliminate the release of PFOA and PFOS in advance of the reporting requirements coming into effect. To the extent that no such elimination or reduction can be made, clients should assess the manner in which such releases can be controlled or isolated in order to shore up potential defenses regarding anticipated future litigation.
Regulatory Compliance and Product Stewardship
Cynthia Stroman
In the proposed rule, EPA outlines the limited direct effects of the proposal – Businesses must report releases of PFOA and PFOS of one pound or more within a 24-hour period; and transport substances or mixtures that contain PFOS or PFOA under DOT’s Hazardous Materials Regulations once DOT completes its listing. For businesses that already report under Toxic Release Inventory (TRI) and related Emergency Planning and Community Right-to-Know Act (EPCRA) and state reporting programs, this new reporting can be integrated into their current reporting. However, the designation may be surprising for businesses that do not typically have significant permitting and reporting requirements, and they will need advice and counsel regarding reporting protocols and requirements. Similarly, for businesses that import, distribute, or sell substances or mixtures that contain PFOS or PFOA, enforcement and liability consequences of transportation incidents may increase under a new DOT listing.
EPA describes as “indirect” the implications for remediation and liability for contamination, but “indirect” does not mean immaterial or insubstantial. Because the proposed designation lowers the threshold for EPA and states to commence remedial action, businesses linked to remediation sites are likely to see PFAS assessments required during CERCLA five-year reviews and state remediation evaluations. Also, because EPA and state agencies have substantial discretion as to which sites to prioritize, factors such as environmental justice discussed above may play more prominent role in prioritization.
A significant indirect implication of the proposed designation is the increased ability of regulators – federal and state – to request information about PFOS and PFOA from a wide range of industries. Businesses managing products and materials and their disposal may receive requests for information that require them to know whether and to what extent their products and operations involve PFAS compounds. It would not be surprising to see such requests in various permitting processes, either for new permits or renewals. Feedback approximately a year ago on EPA’s proposed PFAS reporting rule suggests that many businesses do not have the information needed to respond to such inquiries. EPA’s proposed designation provides yet one more driver prompting businesses in most industries to assess their PFAS profiles, and they would be wise to consult experienced counsel to assess their exposure and implement policies and strategies to mitigate that exposure.
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For questions about the insights presented above, please feel free to contact the individual authors or King & Spalding’s Chemical Currents team at pfastaskforce@kslaw.com.