Environmental law and practice in United States: overview
A Q&A guide to environment law in the United States. This Q&A provides a high level overview of environment law in the United States and looks at key practical issues including emissions to air and water, environmental impact assessments, waste, contaminated land, and environmental issues in transactions. In addition, answers to questions can be compared across a number of jurisdictions to assist in the management of cross-border transactions (see Country Q&A Tool).
This Q&A is part of the global guide to environment. For a full list of jurisdictional Q&As visit www.practicallaw.com/environment-guide.
Environmental regulatory framework
Environmental regulation and enforcement in the US is a collaborative effort between federal, state and local authorities. US Congress enacts federal environmental legislation, implemented through regulations and enforced by federal agencies in the Executive branch of the federal government (see Key Federal Regulatory Authorities). The Judicial branch hears disputes, and interprets and makes binding decisions on legislation.
Many federal environmental laws delegate administration and enforcement to state environmental agencies. Under these laws, the federal government retains residual authority to enforce federal laws if they conclude the states are not doing so under their delegated authority. In some instances, the federal government also retains direct enforcement authority. Except when prohibited by federal law, states are free to adopt laws and regulations that are more stringent than federal law. Accordingly, the states play a major role in environmental permitting and enforcement. Municipalities also may adopt laws that address environmental issues, provided they do not conflict with state and federal laws.
Federal regulatory authorities
The main federal agencies responsible for promulgating regulations and enforcing environmental laws include the:
Environmental Protection Agency (EPA). The EPA is principally responsible for implementing most federal environmental laws (see Federal environmental laws).
US Department of Interior (DOI). The DOI has principal control over public lands and natural resources. Along with other natural resource trustees, DOI has the ability to bring claims for natural resource damages (NRD) under CERCLA and other environmental laws. These damages are separate from claims for recovery of costs to investigate and remediate contamination.
US Army Corps of Engineers (Corps). The Corps enforces permit requirements under the Rivers and Harbors Act (regulating navigation in US waters). It also enforces dredge and fill permit requirements for waters and wetlands in federal jurisdiction under the CWA.
Council on Environmental Quality (CEQ). The CEQ is established within the Executive Office of the President and co-ordinates environmental efforts among federal agencies. One of its most significant responsibilities is to issue regulations and guidance under the National Environmental Policy Act (NEPA), which requires federal agencies to prepare an environmental impact statement (EIS) for major federal actions significantly affecting the environment.
National Marine Fisheries Service (NMFS). NMFS, which is under the National Oceanic and Atmospheric Administration, a division of the Department of Commerce, manages living marine resources and their habitats.
US Department of Justice (DOJ). The Environment and Natural Resources Division within the DOJ is responsible for representing the US in litigation involving environmental laws and enforcing federal civil and criminal environmental laws.
Federal environmental laws
The main federal laws governing the use of land and resources include the:
Clean Water Act (CWA). This regulates the discharge of pollutants into US waters, and dredging and filling of federal wetlands.
Clean Air Act (CAA). This regulates emission of pollutants into the atmosphere. It is administered by the EPA and delegated state environmental agencies.
Resource Conservation and Recovery Act (RCRA). This regulates the treatment, storage, transportation and disposal of hazardous waste.
Safe Drinking Water Act (SDWA). This establishes federal drinking water standards.
Toxic Substances Control Act (TSCA). This regulates the manufacture, importation, processing, and commercial distribution of chemicals.
Emergency Planning and Community Right-to-Know Act (EPCRA). This requires emergency planning and reporting for certain hazardous chemicals. Under EPCRA, local governments must develop emergency response plans in case of a toxic spill.
Comprehensive Environmental Response, Compensation and Liability Act (CERCLA) (Superfund). This imposes strict liability for investigation and remediation of hazardous substance releases. Under CERCLA, certain natural resource trustees (federal, state, or tribal governmental entities) have the ability to bring claims for natural resource damages (NRD). These damages are separate from claims for recovery of costs to investigate and remediate contamination.
National Environmental Policy Act (NEPA). This requires federal agencies to prepare an environmental impact statement (EIS) for major federal actions significantly affecting the environment. The Council on Environmental Quality (CEQ) issues regulations and guidance administering NEPA.
Endangered Species Act (ESA). This regulates the conservation of threatened and endangered species and their habitats. It also controls the import, export, or transportation of endangered species in interstate or foreign commerce.
Federal Insecticide, Fungicide, and Rodenticide Act (FIFRA). This regulates the use, sale, and distribution of pesticides in the US.
Oil Pollution Act (OPA). This addresses the US response to, and remediation of oil spills. The OPA creates a fund supported by a tax on oil to cover the costs related to oil spill cleanup. It also creates liability for parties responsible for the spill for cleanup costs.
Generally, environmental regulations are strictly enforced by regulators at federal, state, and local levels.
The level of federal enforcement has fluctuated, based on political and economic considerations over the years, but enforcement has generally remained vigorous.
There is greater variability in state environmental enforcement. Some states are extremely stringent, while other states are more permissive. Certain municipalities have also developed strong environmental enforcement capabilities.
Most regulated facilities are inspected frequently by federal and state regulators, who issue administrative orders to require compliance, and impose civil administrative penalties for violations. The EPA and state agencies can also commence civil and criminal enforcement actions against polluters.
Certain US environmental requirements also:
Require self-reporting of violations.
Provide causes of action for citizens to bring suits against private parties or governmental agencies to enforce the laws (see Environmental NGOs).
NGOs and citizen groups played a critical role in creating modern environmental law in the US. They continue to play an active role in ensuring that environmental laws are enforced. As part of the regulatory process, NGOs and citizen groups routinely:
Comment on proposed regulations.
Request and obtain information filed by companies with environmental regulators on company operations, including the storage and release of chemicals.
Significantly, NGOs have broad statutory rights to pursue citizen suits and seek affirmative relief from the courts if governmental regulators are not taking diligent steps to correct violations. Many environmental laws are designed to encourage such suits by awarding attorney fees to NGOs when their litigation is successful. Environmental litigation is common in the US in both federal and state courts.
The US does not have an integrated permitting regime. It is not unusual for an industrial facility to require a number of permits under different environmental statutes, including permits for air emissions, discharges to surface water, and treatment, storage and disposal of hazardous waste. Many states and localities have their own permitting regimes, some of which are more stringent than federal law.
Not applicable (see Question 4).
Permits and regulator
The CWA is the primary US law governing water pollution. It requires a permit from the EPA (or a delegated state agency) for the discharge of pollutants into surface waters and establishes water quality standards. The CWA also requires that parties secure a permit from the Corps before dredging or filling 'waters of the United States', a phrase that has been interpreted by agencies and courts to include wetlands bordering federal waterways. The scope of federal jurisdiction in this area has resulted in several split Supreme Court decisions in the last decade. In November 2013, the EPA issued proposed regulations in an attempt to clarify this. Litigation is expected to be enacted on the finalisation of these regulations.
Many state laws impose more stringent requirements and cover broader categories of waters and state wetlands than those covered by federal law.
There are several prohibited activities provided under federal law:
The CWA prohibits any discharge of pollutants into US waters or dredging and filling of jurisdictional waters (without a permit or in violation of a permit).
The Ocean Dumping Act prohibits the dumping of materials into the ocean (without a permit or in violation of a permit).
The Safe Drinking Water Act (SDWA) prohibits the violation of drinking water standards.
Failure to obtain a permit required under the CWA, or non-compliance with permit limitations and conditions (including monitoring requirements) can subject a company to administrative, civil, and/or criminal penalties of up to US$37,500 per day per violation. Although the full daily amount is rarely imposed, penalties can be substantial. Recent Supreme Court litigation has established that regulated parties have the right to challenge the EPA’s jurisdiction in court on receipt of a compliance order. Criminal penalties can also be imposed for knowing and wilful violations of the CWA.
The Clean Air Act (CAA) regulates air emissions from stationary sources (such as power plants and factories) and mobile sources (such as cars and trucks). The EPA (directly and through the states) implements several different programmes under the CAA, including the:
National Ambient Air Quality Standards (NAAQS). The EPA establishes national ambient air quality standards for particulate matter, sulphur dioxide, carbon monoxide, nitrogen dioxide, ozone, and lead.
State Implementation Plans (SIPs). The NAAQS ambient standard is translated into an emissions standard. This means that all polluters complying with emissions standards, will also comply with ambient standards. In the CAA, this is done through SIPs. States are required to develop and periodically revise implementation plans to provide:
enforceable emissions limitations;
prohibitions on interstate air pollution;
a program of enforcement.
SIPs are very important because they are the main way to determine which existing sources are regulated. If a state fails to submit a SIP, or submits one that is defective, the EPA must provide a federal implementation plan for the state. The EPA has previously been reluctant to issue such plans due to the difficulties that enforcement would cause.
New Source Performance Standards (NSPS). The EA sets federal uniform, technology-based, emission standards for new and modified air pollution sources, based on the category of source.
Prevention of Significant Deterioration (PSD) & New Source Review (NSR). These programs require new facilities or facilities that undergo major modifications to obtain upgraded permits and install strict pollution control technology. These permits specify what construction is allowed, what emission limits must be met, and typically how the emission source must be operated. The permits are usually issued by state air pollution control authorities. There has been substantial litigation in the US alleging that major modifications were made to stationary sources without first obtaining appropriate permits.
Stratospheric Ozone Protection. This program phases out production and use of chemicals that destroy stratospheric ozone.
Mobile Source Regulation. Title II of the CAA regulates emissions from mobile sources.
The CAA also contains special provisions applicable to fossil fuel fired power plants, aimed at reducing sulphur dioxide emissions by ten million tons below 1980 levels. This acid rain programme establishes a market-based trading programme for emission allowances to encourage cost-effective reduction of sulphur dioxide emissions. The programme also establishes nitrogen oxide emissions reduction standards for existing coal-fired utility boilers and allows emissions averaging to reduce costs. The acid rain programme has been quite successful and has served as a model for other efforts to encourage trading of pollution allowances. Some of these efforts have been invalidated by the courts for being beyond existing statutory authority, but there is continued receptivity to using market-based mechanisms to reduce pollution.
Under the CAA, all major sources of air pollution are required to obtain a Title V operating permit, which is typically issued by state authorities. The permit is required for any stationary source that emits or has the potential to emit 100 tons per year or more of any air pollutant, ten tons per year or more of any hazardous air pollutant or 25 tons per year or more of any combination of hazardous air pollutants. The Title V permit specifies what facilities must do to control air pollution.
Permit conditions typically establish:
Limits on the types and amounts of air pollution allowed.
Operating requirements for pollution control devices or pollution prevention activities.
Monitoring and record keeping requirements.
The CAA and many state laws also require permits for minor sources. The requirements for these permits are less rigorous but also typically include emission limits and monitoring and record keeping requirements.
Non-compliance with the CAA can result in civil penalties of up to US$37,500 per day per violation. Criminal penalties for wilful and knowing violations can result in up to five years federal imprisonment, and submission of false records can result in up to two years federal imprisonment. Criminal sanctions can also include fines of up to US$250,000 for individuals and US$1 million for companies. It is not uncommon for major air violations in the US to trigger substantial monetary penalties and capital upgrade requirements.
Climate change, renewable energy and energy efficiency
In the last few years the EPA has implemented a number of initiatives under the CAA to reduce GHGs from certain sources. This includes determining that six GHGs in the atmosphere threaten the public health and environment (Endangerment Finding). An endangerment finding will trigger regulation of the pollutant under the CAA. It also led the EPA and the National Highway Traffic Safety Administration (NHTSA) to set new emissions and mileage standards for motor vehicles (Tailpipe Rule). It is the first time that the CAA has been applied to carbon dioxide and other global warming pollutants. There is a pending Supreme Court case that will address the EPA’s interpretation of the Clean Air Act (see Reform). This case will be heard in February 2014 and a decision is expected in mid 2014.
Federal law does not currently require reduction of GHG emissions from buildings. Proposed legislation would create national standards to reduce GHG emissions from buildings that would be implemented through state and local building code amendments. It remains to be seen whether this requirement will become law.
Voluntary efforts to address GHG emissions from buildings are taking root in the US to a significant extent. The US Green Building Council developed the Leadership in Energy and Environmental Design (LEED), a voluntary green building certification system that provides standards for environmentally sustainable construction, including reducing a building's GHG emissions. LEED is a measurement tool and rates buildings on a 100-point scale, plus ten possible bonus points for innovation in design and regional priority. Points are awarded based on the extent to which:
Site design sensitivity to plants, wildlife, and air quality.
The building's efficient use of water.
The building's energy performance and use of renewable energy sources.
Use of sustainable construction materials.
Use of energy efficient lighting and temperature controls.
LEED certification is available to new commercial construction, major renovations, interior projects, and existing building operations. There are four certification levels: Certified, Silver, Gold, and Platinum. Many state and local governments offer incentives for becoming LEED certified. Most Class A office buildings are now expected to have some level of LEED certification to meet market expectations.
Parties to UNFCCC/Kyoto Protocol
The US is party to UNFCCC and a signatory to the Kyoto Protocol. However, Congress has not ratified the Kyoto Protocol and as a result it lacks the force of law.
The US has taken the following measures to implement the UNFCCC:
It produces an annual inventory of GHGs and sinks.
It produces and submits a periodic National Communication of the US (the Climate Action Report).
It contributes funding to the Global environmental Facility, the financial mechanism of the UNFCCC.
There is no national carbon trading scheme in the US. However, there are some regional trading initiatives to create carbon markets in the US. For example:
The Regional Greenhouse Gas Initiative (RGGI), is an agreement between ten North-Eastern and Mid-Atlantic states that have capped emissions of carbon dioxide from certain power plants and allow sources to trade emission allowances. It is the first mandatory cap-and-trade programme for carbon dioxide in the US.
The Western Climate Initiative and Midwestern Climate Initiative are in the early stages of development but would cover a broader range of sources and GHGs and create explicit cross-border linkages with Canadian provinces.
Environmental impact assessments
The National Environmental Policy Act (NEPA) requires federal agencies to prepare an EIA for major federal actions that may have a significant impact on the environment. Major federal actions include federal projects, and also private projects that receive federal financial assistance or federal permits. The Council on Environmental Quality (CEQ), a unit of the Executive Office of the President, oversees the NEPA process and promulgates NEPA regulations. Private projects that do not involve federal financial assistance or approvals are exempt from the NEPA.
There are three classes of actions under NEPA:
Minor projects, which are categorically exempt and do not require NEPA analysis.
Actions that may have a significant impact on the environment, which require an environmental assessment (EA). If the lead federal agency issues a finding of no significant impact (FONSI), then the agency does not have to prepare a full environmental impact statement (EIS).
Actions that are likely to have a significant impact on the environment, which require an EIS.
EIAs under NEPA address impacts on air and water quality, traffic, noise, population patterns, species habitat, and other environmental considerations. The federal agency conducting the review must consider the results of the EA and/or EIS before making a final determination on whether to proceed with the project.
Many states have adopted "little NEPAs" that require similar environmental reviews. Some "little NEPA" statutes are more stringent than their federal counterpart.
Failure to comply with NEPA (or similar state law requirements) may result in the project's suspension by the courts. Controversial projects in the US are frequently subject to litigation challenging the adequacy of environmental reviews. Project proponents have a strong stake in making sure that governmental agency review of environmental impacts will withstand litigation challenges.
Permits and regulator
The Resource Conservation and Recovery Act (RCRA) vests the EPA and delegated state environmental agencies with broad authority to regulate the treatment, storage and disposal of hazardous and non-hazardous waste from creation to disposal. Generators, transporters, and those who treat or dispose of hazardous waste must comply with an extremely complex set of requirements. A manifest must accompany each shipment of hazardous waste from the point of generation to the place of ultimate treatment or disposal.
Owners and operators of hazardous waste facilities must obtain a RCRA permit from the EPA or an authorised state. The permit:
Describes the activities that a facility can conduct.
Outlines facility design and operation.
Establishes safety standards.
Describes activities that the facility must perform, including monitoring and reporting.
Owners and operators of hazardous waste facilities must develop emergency plans, have insurance and financial backing, and train employees to handle hazards. RCRA permits also impose corrective action requirements to investigate and remediate environmental contamination when a facility is shut down.
Operators must obtain a permit to operate and handle hazardous waste (see above Prohibited activities).
Special rules for certain waste
Although RCRA provides a framework for the EPA to regulate non-hazardous solid waste disposal facilities, municipal and other non-hazardous solid waste is generally regulated by state and local governments.
Regulations specifically targeting electronic waste do not yet exist at the federal level. However, some states and localities have implemented laws regulating electronic waste.
Violators of RCRA are subject to significant enforcement actions and penalties, and can subject the violator to administrative, civil, and criminal enforcement actions. Minor violations may be resolved through administrative compliance orders and penalties of up to US$37,500 per day. More serious violations, such as transporting waste to a non-permitted facility, carry more significant monetary penalties and imprisonment. Hazardous waste violations are taken very seriously by US regulators. Criminal liability has been imposed on corporate executives who knowingly authorise or permit hazardous waste violations.
In the US, asbestos is regulated under two environmental laws:
CAA’s National Emission Standard for Hazardous Air Pollutants (NESHAP).
Asbestos in schools is regulated under the Asbestos Hazard Emergency Response Act (AHERA), which is part of the The Toxic Substances Control Act (TSCA).
The EPA requires advance notice before disturbing asbestos in buildings and requires certain procedures to be observed during renovation, demolition, and other activities where asbestos is present. In addition, waste generators, transporters, and waste disposal site operators must comply with EPA reporting and record-keeping requirements. Several states and local governments have enacted their own asbestos regulations governing building renovations that are more stringent than EPA regulations.
The Occupational Health and Safety Administration (OHSA) has also imposed obligations on employers to protect their employees from asbestos exposure. As a result, many building owners adopt asbestos operating and management plans to train employees to recognise materials that may contain asbestos and to take appropriate steps to prevent inadvertent exposure to asbestos.
People who remove or dispose of asbestos from buildings without following proper procedures can be fined up to US$25,000 per day per violation. The EPA can also bring criminal charges against a knowing or wilful violator. There have been several cases brought against building owners, construction companies, and others who ordered demolition work on buildings without first determining whether asbestos was present.
Regulator and legislation
The Comprehensive Environmental Response, Compensation and Liability Act (CERCLA (Superfund)) was enacted in 1980 to address soil and groundwater contamination arising from decades of industrial activity. It applies to the release of a "hazardous substance", which does not include petroleum (petroleum spills are generally addressed under state law). Superfund originally included federal taxes on certain industries that provided substantial governmental funding for environmental clean-ups. Those taxes expired in 1995 and have not been renewed. Accordingly, since 2003 government funding for clean-ups has been limited. However, economic stimulus money has recently been tapped for clean-ups in certain circumstances.
Investigation and clean-up
Whether or not federal funding is available for clean-ups, CERCLA creates significant potential liability for a broad range of companies that have a present or past nexus to a contaminated facility. CERCLA allows the government and private parties to recover site investigation and remediation costs from a broad range of potentially responsible parties (PRPs). Those PRPs include (see Question 14):
The current owner and operator of contaminated property.
Past owners and operators of such property during time periods when disposal took place.
Generators and transporters of waste that came to be located at a contaminated site.
CERCLA also gives the EPA the authority to issue unilateral administrative orders compelling PRPs to investigate and remediate certain contaminated sites. Recalcitrant parties face treble damages if they fail to comply with such orders. Finally, CERCLA contains provisions requiring spills in excess of certain quantities to be reported to the EPA. Once spills are reported, the EPA can require that they be investigated and remediated. EPA's Office of Solid Waste and Emergency Response (OSWER) implements the Superfund programme. Many states have enacted comparable state laws that track and in some cases go beyond CERCLA's broad liability provisions.
Contaminated sites are identified in the US through information provided by citizens, environmental groups, governmental agencies, and other interested parties. A site that is being evaluated by the EPA will be entered into the Comprehensive Environmental Response, Compensation, and Liability Information System (CERCLIS), the EPA's online inventory of potential hazardous substance release sites. If the site is sufficiently contaminated to warrant federal action, it may be put on the National Priorities List (NPL), which authorises federal funds to be spent on remediation. Sites also can be listed on state and local contaminated site lists.
In addition to facing liability for site investigation and remediation costs, PRPs can face liability for natural resource damages (NRD) in a claim brought by federal, state, local or tribal natural resource trustees. These NRD claims can be substantial, particularly when contaminated sediments are present in lakes and rivers, or when a source of public drinking water has been contaminated. In addition, if a PRP violates other provisions of CERCLA (including reporting obligations), or fails to abide by the terms of a consent order with EPA, it can face penalties of up to US$32,500 per day.
CERCLA liability is retroactive. Parties can be held liable for acts that happened before Superfund was enacted in 1980, even if the conduct was fully legal at the time.
CERCLA liability can be joint and several. Any one PRP may be held liable for the entire clean-up of the site when the harm caused by multiple parties cannot be separated.
CERCLA employs strict liability. A PRP cannot simply say that it was not negligent or was operating according to industry standards. If a PRP sent some amount of the hazardous material to a site, that party faces almost certain liability unless it qualifies for a limited number of defences.
Limitation of liability
If a party wishes to purchase a site known or suspected to be contaminated (a “brownfield” site), there is a statutory exemption from CERCLA liability provided certain conditions are met. A bona fide prospective buyer of contaminated property will not be deemed a PRP if it conducts all appropriate inquiry into the property before it purchases and exercises reasonable care in relation to existing contamination after the purchase. The specifics of this defence are not well defined, so buyers of contaminated property in the US should exercise caution and seek appropriate technical and legal advice. Recent EPA guidance provides a similar defence to lessees or tenants of contaminated property, even if the landlord/owner is not eligible for the defence. The tenant must show that they meet all the requirements for BFPP status, except for the “all appropriate inquiries” requirement.
Under CERCLA, lenders are not held liable for contamination of a borrower's facility, provided they do not participate in the management of the facility. Merely holding a lien on contaminated property or having the unexercised capacity to influence a borrower's operations does not constitute participating in management. However, a lender can participate in management and expose itself to potential liability under CERCLA if it either:
Exercises decision-making control concerning environmental compliance related to the borrower's facility and, in doing so, undertakes responsibility for hazardous substance handling or disposal practice.
Exercises control at a level similar to that of manager of a facility, so that the lender assumes responsibility for the day to day decision-making on environmental compliance of all or substantially all of the operational functions of the facility other than environmental compliance.
Lenders are expressly permitted to:
Inspect and monitor a borrower's facility or property.
Protect the environment from a release of contamination.
Conduct a response action, as long as those actions do not rise to the level of participation in management within the meaning of CERCLA.
Provide financial or other advice to prevent or cure a borrower's default.
Change the terms of the security interest.
CERCLA also contains a safe harbour provision that allows lenders to engage in workouts and foreclose in relation to contaminated property without attracting environmental liability. In the workout context, a lender who did not participate in management during the life of a loan can:
Maintain a borrower's business activities.
Wind up operations.
Undertake a response action.
Sell, re-lease or liquidate the facility.
Take actions to preserve, protect or prepare the property for sale.
After foreclosure, the lender must attempt to divest itself of the property at the earliest practicable commercially reasonable time, using commercially reasonable means. The specifics of this safe harbour are determined after the fact and can often be treacherous in their application. Many state environmental laws have adopted similar safe harbours. Accordingly, lenders should be certain that their actions fall squarely within all applicable safe harbours, particularly when they become involved in a borrower's operations during workout activity, or when they foreclose on contaminated property.
Private individuals can bring actions under CERCLA and comparable state environmental laws to recover the costs of investigating and remediating contamination that migrates onto their land from an adjacent site. They can also seek relief under citizen suit provisions of numerous federal and state environmental statutes if surrounding properties are engaged in conduct that violates applicable environmental requirements. They can also bring actions under the common law for property damage, nuisance, trespass and personal injury. Statutory actions are the primary vehicle for relief because they are generally easier to bring than private common law actions. Many statutory claims permit environmental plaintiffs to recover their attorney fees and costs if litigation is successful.
In April 2013, the EPA issued proposed guidelines that highlight the importance of vapor intrusion impacts in property and corporate transactions, particularly when there are known or suspected off-site contaminant plumes. Vapor intrusion is the migration of hazardous vapor from contaminated soil or groundwater into an overlying building. It is of greatest concern at sites contaminated by volatile organic compounds (such as chlorinated solvents and gasoline constituents).
Vapor intrusion is becoming a focus for regulators in the US, causing them to reopen remediations that were thought to be complete. The EPA’s guidance provides:
New recommendations for preemptive mitigation.
Early action at certain sites before a full vapor intrusion analysis is complete.
Advice on the use of deed restrictions and other institutional controls to restrict land use or activities that could otherwise result in unacceptable exposure to the vapor intrusion pathway.
Environmental liability and asset/share transfers
An asset buyer's environmental liability is typically determined by reference to state law. Generally, a seller's pre-closing liabilities remain with the seller and the buyer only inherits environmental liabilities resulting directly from ownership of the purchased assets. An asset buyer is not generally liable for environmental issues that arise from past acts or previously divested assets. Therefore, for example, a buyer of contaminated land would be responsible for investigation and remediation of the purchased land but would not typically be responsible for pre-closing disposal of waste at an off-site landfill or for contamination at previously divested sites. Important exceptions can apply if:
The buyer agrees to assume the seller's liabilities.
The transaction amounts to a consolidation or de facto merger.
The buyer is a mere continuation of the selling company.
The transaction is entered into fraudulently to escape liability.
By contrast, a buyer who acquires a company through a merger or consolidation generally assumes the environmental liabilities of the acquired company. Similarly, a buyer of shares steps into the shoes of the acquired company and acquires its environmental liabilities. Under CERCLA and other US environmental laws, an acquired company's environmental liabilities can extend back in time for many years and may involve property and/or subsidiaries long since divested by the acquired company.
As a former owner or operator of a contaminated site, under CERCLA and other US environmental laws, a seller can retain environmental liability even after it sells the property in an asset purchase. The selling company can also remain liable under common law principles for property damage and personal injury. Sellers sometimes seek to shift these risks to the buyer by seeking an indemnity for any environmental claims that can arise in relation to the purchased asset, and a waiver of claims back from the seller. The parties' respective leverage in the transaction will determine whether such provisions are attainable. Contractual allocation of liability among parties does not alter each party's liability to the government.
In a share sale, all of the company's liabilities remain with the company. Shareholders (including former shareholders) are not typically liable for corporate liabilities. In rare instances, shareholders, corporate officers and employees can be liable if they have personally participated in operations that resulted in contamination, but such findings typically occur in closely held companies.
There is no general statutory duty to disclose environmental information. However, such a duty does exist in certain states and industries.
Under common law, once sellers elect to provide environmental information, they cannot selectively withhold or misrepresent material environmental facts. In practice, the amount of environmental information disclosed to the buyer usually depends on the scope of disclosure negotiated between the parties. Most buyers require all known environmental information to be provided. Companies providing financing or insurance also generally require such disclosure from their counterparties.
In the sale of real property, sellers generally owe a duty to buyers to disclose known latent defects and to refrain from misrepresentations concerning the property, including in relation to environmental issues.
Some states have transaction trigger statutes that require sites to be investigated and, if necessary, remediated as a condition to the closing of an asset sale, stock sale, or merger. In particular, New Jersey and Connecticut are two states with transaction trigger statutes that cover a broad range of corporate and real estate transactions. In these states, private environmental consultants are licensed to implement the remediation laws and self-certify that they have satisfied the requirements. These determinations are subject to later challenge and therefore should be assessed in the context of the transaction. Most of these states allow the parties to close the transaction before investigation and remediation is complete if they enter into a written agreement to investigate and remediate after the transaction closes.
See above Asset sale.
It is common for environmental due diligence to be undertaken in asset and share sales as well as mergers, particularly, but not exclusively, when transactions involve companies with current or past industrial operations. Even properties whose current uses may not suggest contamination could have significant environmental liabilities associated with past uses (such as a shopping mall built on a former landfill or a fast food restaurant built on a former gasoline service station). Areas that are typically covered include:
Previous and current conditions and historical uses of any real estate involved.
Potential liability for on or off-site contamination.
Compliance history and status of the site.
Litigation and enforcement risks
Upcoming regulations which could potentially affect the business sector.
Occupational health and safety exposures.
Types of assessment
Due diligence investigations vary depending on the type of company being bought. Typically, an initial Phase I environmental site assessment is conducted. If these activities suggest that there may be contamination on-site, follow-up Phase II testing and sampling of soil and groundwater may be conducted or, if timing or confidentiality concerns are critical, clean-up cost estimates may be developed based on existing information and professional judgment.
A Phase I environmental site assessment includes:
A tour of the property and any on-site facilities.
Interviews of the current owner or operator and any neighbouring landowners.
A review of documents and databases (including permits, permit applications, compliance records, and enforcement and litigation materials), property and area maps, photos of the property, and visual observations of adjacent properties to identify potential risks.
Compliance with current American Society for Testing and Materials (ASTM) standards for Phase I investigations is necessary for an asset buyer to be eligible for the all appropriate inquiry defence to liability under CERCLA (although other elements of that defence must also be met post-closing). If the Phase I identifies any recognised environmental conditions, a Phase II involving intrusive sampling can be conducted consistent with deal timing and other strategic considerations. The Phase II typically involves soil and groundwater samples at or near the site. It can also involve locating and testing underground storage tanks.
Environmental consultants generally conduct site and compliance assessments, and are involved on behalf of both the buyer and seller. The EPA's all appropriate inquiry standard (see Question 14) requires that a qualified professional conducts the site assessment.
Issues that are typically covered in an engagement letter with an environmental consultant include:
Staffing and educational or experience levels necessary to meet any applicable statutory standards.
Fees and billing terms.
Scope of the assessment.
Timing of the report.
Documents to be provided to the client.
Treatment of field notes and data and other documents compiled during the project.
Warranties and indemnities.
Limitations on liability.
Standard of care.
Environmental representations and warranties, environmental covenants, and environmental indemnities are negotiated between the parties and do not vary dramatically between asset and share sales. In asset sales, particular attention is paid to defining which environmental liabilities are assumed and which are excluded under the terms of the contract. In share sales and mergers involving publicly held companies, environmental indemnities may not be available as a practical matter.
Although there is no set formula, some typical representations and warranties include that:
There is no environmental contamination other than as disclosed (this may be qualified by knowledge or materiality depending on the leverage of the parties).
The seller has provided all environmental reports and other material environmental documents in its possession, custody or control.
As of the date of closing, the facility complies in all material respects with all applicable environmental laws and regulations and has obtained and complied with the conditions of all required environmental permits.
No underground storage tanks, asbestos containing materials (ACMs), or polychlorinated biphenyls (PCBs) are present on or under the property (this may be qualified by knowledge depending on the leverage of the parties)
There are no requests for information, pending or threatened governmental or private party claims or litigation relating to violations of environmental laws or environmental investigation or remediation obligations, including under CERCLA.
Indemnities typically cover:
The seller's breach of the environmental warranties provided in the contract.
Damages incurred by the buyer relating to environmental liabilities contractually assumed or retained by the seller.
Damages incurred in relation to certain known environmental issues identified in the representations and warranties.
Environmental warranties and indemnities negotiated in share sales are generally similar to those negotiated in asset sales, although the scope of environmental representations and indemnities can be broader to cover divested facilities and pre-closing off-site disposal.
Environmental representations and warranties and environmental indemnities typically terminate after a specified period of time. The appropriate length of time will depend on the nature of the underlying environmental issues, market conditions, and the leverage exercised by the parties to the negotiations. Sometimes the warranties and indemnities terminate with reference to government sign-off, if they are directed to specific environmental conditions involving regulatory closure requirements.
Some courts have held that an indemnity with no time period is limited to the statute of limitations for contracts in a specific state or for a reasonable period of time. A contract can involve various types of baskets and caps, and the amounts of the baskets and caps are generally tailored to the extent and nature of the potential environmental liability.
Reporting and auditing
Federal and state environmental regulators maintain a wide variety of online information concerning:
Much of this information is accessible for free, although most parties involved in environmental diligence use commercial services that aggregate the information and allow it to be sorted by using different geographic and other screens.
Information not readily accessible online can be obtained through the Freedom of Information Act (FOIA) and state equivalents. FOIA requires an agency to disclose documents in its control unless those documents fall under a specified exemption. FOIA requests are a standard part of environmental due diligence.
Companies have monitoring requirements under their permits. Companies are not typically required to carry out general environmental auditing. However, many companies do so voluntarily to reduce the risk of significant civil and criminal penalties. Both the EPA and many state environmental agencies encourage companies to conduct environmental audits and provide lower penalties if violations are voluntarily discovered and reported.
CAA and CWA permit holders must periodically report on compliance with the limitations specified in their permits. Additionally, unpermitted spills and releases to the environment in reportable quantities must be promptly reported to the appropriate authority.
The requirement to report the discovery of historic contamination is less strict than the requirement to report a new spill, although the EPA has taken the position that even historic spills should be reported in certain circumstances, and certain states require all contamination above clean-up levels to be promptly reported.
Most environmental permits require permit holders to grant regulators access to the permitted facility to inspect and review documents. In addition, most statutory and regulatory regimes in the US give federal and state regulators broad authority to conduct inspections and review documents. During an on-site inspection, a regulator can:
Interview facility or site representatives.
Review records and reports.
Observe site operations.
Inspections may be conducted under more than one statute.
Environmental insurance is readily available from many insurance carriers and generally provides protection against tort liabilities, and coverage if clean-up expenses exceed a specified level. As with all insurance, careful attention to policy exclusions and conditions is necessary to ensure the required coverage is being provided.
The most common types of environmental insurance include:
Clean-up cost cap. This provides the developer with protection against the possibility that actual clean-up costs exceed original estimates.
Pollution liability protection, providing coverage for developers and long-term owners of redeveloped brownfield sites, up to specified amounts, if users of those properties make claims based on continuing pollution conditions.
Secured creditor, which protects lenders if a borrower defaults on a loan or if collateral value is lost due to pollution.
Some states impose taxes on the disposal of hazardous waste. The Superfund, which is used for the clean-up of hazardous waste sites when no responsible party is found, has been financed largely from taxes on petroleum and chemical feedstocks.
Federal and state governments offer tax breaks for environmental projects, such as the Brownfields Tax Incentive, which provides tax incentives for the clean-up and revitalisation of properties that meet specific land use and contamination requirements. Tax incentives are also given for research and development of alternative energy sources.
Proposals for reform include the following:
Climate Change. There is limited chance of a federal response to the problem of climate change and the focus is on the executive branch.
President Obama has prompted the EPA’s regulation of greenhouse gas (GHG) emissions in a number of ways. Under the mobile sources program, the EPA and NHTSA issued regulations in 2010 to control GHG emissions from motor vehicles. In September 2013, EPA proposed regulations setting GHG emissions limits from new power plants. The regulation is expected to be finalised in 2014. It is likely that following its initial publication, the final rule will be made into law.
There is also a pending Supreme Court case that will address the EPA’s interpretation of the Clean Air Act, demonstrating that any regulation of GHGs under the Act must trigger Title V permitting of GHG emissions for all pollutants from all new or modified sources. This case will be heard in February 2014 and a decision is expected in mid 2014.
Cooling Towers. Section 316(b) of the Clean Water Act requires that the location, design, construction and capacity of cooling water intake structures reflect the best technology available for minimising adverse environmental impact, including thermal pollution from coal plants. The EPA is expected to issue a final rule establishing standards for cooling water intake structures in January 2014. The rule will apply to large existing power plants that withdraw 50 million gallons per day or more and that use at least 25% of their withdrawn water for cooling purposes only. This is expected to affect hundreds of power plants across the country.
CERCLA Mega sites. CERCLA sites have recently included contaminated waterways (such as rivers and lakes) in addition to contaminated land and former landfills that accept industrial waste. These sites involve significant costs for remediation and investigation and complex technical and legal issues. Potentially responsible parties (PRPs) are struggling to find ways to address these sites in a safe and cost-effective manner.
Resiliency. Market rates for flood insurance is very high in the US due to severe storms and the predicted rise of sea levels. However, since the 1960s, the National Flood Insurance Program (NFIP) has been mediating these high market rates for property owners by providing subsidies to eligible existing flood zone properties. In July 2012, Congress cut funding for this to address the growing national deficit and to allow rates to reflect the actual risk of owning and maintaining flood-prone properties. This act of Congress(Biggert-Waters Flood Insurance Reform Act of 2012 ( BW-12)), was set to take effect in 2014. However, shortly after its enactment, a series of severe storms devastated several heavily developed areas of the US coastline. Following this, public pressure has mounted to delay the implementation of BW-12 and to maintain the existing subsidies for flood insurance until the public has fully recovered from the effects of the storms. A proposal to delay the implementation of BW-12 is currently pending in Congress while a study is conducted on the NFIP’s affordability.
The regulatory authorities
Environmental Protection Agency (EPA)
Main activities. Implementing federal environmental laws concerning (among others):
- Water pollution.
- Air pollution.
- Hazardous waste.
- Toxic substances.
- Contaminated properties.
Department of Justice, Environment and Natural Resources Division
Main activities. Enforcing civil and criminal pollution laws, defending environmental challenges brought against the US government, and bringing and defending cases under the wildlife protection laws.
Department of Interior
Main activities. Preservation of public lands and natural and cultural resources through:
Protecting land and water resources.
Maintaining recreational sites.
Managing energy projects on federal land.
Conserving fish and wildlife.
US Army Corps of Engineers
Main activities. Implements the Clean Water Act in relation to dredge, fill, and construction permitting, and otherwise manages federal navigational channels pursuant to the Rivers and Harbors Act.
White House Council on Environmental Quality
Main activities. Co-ordinating federal environmental efforts to ensure that federal agencies consider the effects of their policies on the environment.
National Oceanic and Atmospheric Administration, Department of Commerce
Main activities. Manages living marine resources and their habitats..
Occupational Safety and Health Administration, Department of Labor
Main activities. Regulates the health and safety of workers.
Description. A complete and up-to-date version of the US Code, containing all federal laws. Most environmental laws are codified at Title 42 of the US Code.
In addition, the EPA maintains a webpage (http://www2.epa.gov/laws-regulations/laws-and-executive-orders) that provides downloadable links to and summaries of many environmental laws and relevant executive orders.
The EPA also provides implementing regulations of the laws at http://www2.epa.gov/laws-regulations/regulations.
Jeffrey B Gracer
Sive, Paget & Riesel, PC
Professional qualifications. State of New York and State of New Jersey, Attorney at Law
Areas of practice. Hazardous substance and toxic tort litigation; environmental permitting and approvals; resolution of regulatory enforcement matters; environmental impact assessments; historic preservation reviews; contaminated site remediation; brownfield redevelopment and environmental insurance coverage.
Non-professional qualifications. BA, Columbia College, Columbia University, New York; JD, Columbia School of Law, Columbia University, New York
- Representation of a UK multinational in a US Superfund matter.
- Representation of non-US clients in environmentally sensitive transactions and regulatory matters.
- Representation of privately-held corporate landowner in litigation against the New York State Department of Environmental Conservation establishing eligibility of site in West Chelsea, Manhattan for brownfield tax credits; remediation of site under New York State’s Brownfield Cleanup Program; and negotiations with prior industrial owner regarding reimbursement of cleanup costs.
- Representation of publicly-listed realty trust in connection with remediation and redevelopment of contaminated site in Harlem under New York State’s Brownfield Cleanup Program.
Languages. English, Spanish
- Chair, Environmental Law Committee, New York City Bar Association.
- Founder and Chair of Environmental Program at the Vance Center for International Justice at the New York City Bar Association.
- Member, Advisory Group Meeting for the Inter-American Judicial Capacity Building Program on Environment and Natural Resources.
Mr Gracer wishes to also acknowledge the assistance of law clerk Priya Murthy, Sive, Paget, & Riesel PC, in the preparation of this article.