Ninth Circuit Holds District Courts Must Engage In An Independent Substantive Evaluation Of CERCLA Consent Decrees And May Not Afford A State Agency The Same Level Of Deference As EPA

In State of Arizona v. Raytheon Co.. et al., Case No. 12-15691, 2014 U.S. App. LEXIS 14993 (9th Cir. Aug. 1, 2014), the Ninth Circuit reaffirmed the requirement that district courts engage in meaningful substantive review of consent decrees under the Comprehensive Environmental Response, Compensation, and Liability Act (“CERCLA”) to determine if there is a rational relationship, based on sufficient evidence, between the proportion of liability attributable to each settling party and the proportion of total costs to be paid by such party under the agreement. Although the required review to be undertaken by the district court is based on its previous opinion in United States v. Montrose Chem. Corp. of Cal., 50 F.3d 741, 747 (9th Cir. 1995), in Arizona v. Raytheon, the Ninth Circuit addresses an issue not present in Montrose: the level of deference to be accorded a state agency where it, not EPA, is the proponent of a proposed consent decree under CERCLA. In these situations, the Ninth Circuit held the required Montrose review will necessarily involve additional scrutiny by the district court to reflect the reduced deference afforded the judgment of the particular state agency involved.

At issue in Arizona v. Raytheon are costs to clean up contamination from a landfill investigated by the Arizona Department of Environmental Quality (“ADEQ”) under CERCLA and its Arizona state law counterpart, the Arizona Water Quality Assurance Revolving Funds (“WQARF”). A group of PRPs (the “Settling Parties”) approached ADEQ regarding early settlements pursuant to CERCLA § 113(f)(2), which would provide the Settling Parties with releases of liability for contribution claims. In response, ADEQ sent early settlement offers to the Settling Parties requiring them to pay damages in exchange for ADEQ’s releasing them from liability to the state and third parties, including non-settling PRPs at the site.

To obtain judicial approval of the consent decrees, as required by CERCLA § 113(f)(2), the State of Arizona (the “State”) brought an action under CERCLA and WQARF against the Settling Parties and filed a motion seeking approval of the consent decrees. Thereafter, ADEQ sent public notice of the proposed consent decrees with the Settling Parties, to which certain non-settling PRPs (“Non-Settling Parties”) provided comments objecting to the settlement. The State then filed a motion seeking approval of the consent decrees, asserting that the liability of each Settling Party was de minimis, amounting to less than 0.2% of the $75 million estimated clean up costs.

Since non-settling PRPs may bear the costs if early settlements are disproportionately low, the Ninth Circuit has previously held that non-settling PRPs have standing to intervene to oppose entry of consent decrees in CERCLA actions because the public notice and comment procedure is insufficient on its own to protect the interests of non-settling PRPs. United States v. Aerojet Gen. Corp., 606 F.3d 1142, 1152-1153 (9th Cir. 2010). Accordingly, the district court in this case permitted the Non-Settling Parties to intervene, over the objections of the State.

After intervention, the Non-Settling Parties opposed the State’s motion for entry of the consent decrees, relying on Montrose’s holding that a district court must independently determine whether consent decrees are substantively “fair, reasonable, and consistent with CERCLA’s objectives,” and arguing that the State had not proffered sufficient evidence for the district court in this case to make such a determination. The district court disagreed; it approved the consent decrees, and the Non-Settling Parties brought an appeal to the Ninth Circuit.

The Ninth Circuit vacated and remanded the district court’s approval of the consent decrees, concluding that the district court “failed to independently scrutinize the terms of the agreements” and “afforded undue deference to the ADEQ.” Arizona v. Raytheon, 2014 U.S. App. LEXIS 14993 at *11-12. The Ninth Circuit stated that it previously provided the proper legal standard for reviewing CERCLA agreements in Montrose, which “requires that the district court ‘gauge the adequacy of settlement amounts to be paid by settling [parties]’ by engaging in a comparative analysis” of each party’s estimated liability with its settlement amount relative to the estimated remedial costs. Arizona v. Raytheon, 2014 U.S. App. LEXIS 14993 at *18, quoting Montrose, at 747. The Ninth Circuit Court cited with approval a First Circuit opinion holding courts must determine that CERCLA agreements apportion liability based on rational estimates of comparative fault, taking into consideration how much harm each PRP has done. Arizona v. Raytheon, 2014 U.S. App. LEXIS 14993 at *15-16, citing United States v. Charter Int’l Oil Co., 83 F.3d 510, 521 (1st Cir. 1996).

Relying on these authorities, the Ninth Circuit stated that it is not enough for there to be sufficient information in the record for the district court to evaluate the adequacy of CERCLA settlements. Instead, the Ninth Circuit expressly held that the “district court must actually engage with that information and explain in a reasoned disposition why the evidence indicates that the consent decrees are procedurally and substantively ‘fair, reasonable, and consistent with CERCLA’s objectives.’” Arizona v. Raytheon, 2014 U.S. App. LEXIS 14993 at *17, citing Montrose, at 748. Without this, the Court explained, an appellate court cannot determine whether a district court abused its discretion in approving a CERCLA settlement.

Here, the Ninth Circuit found the district court did not engage in the analysis required by Montrose but simply deferred to the ADEQ’s representation that the settlements were fair and reasonable. Indeed, the district court provided only a footnote regarding the State’s estimate of remedial costs and each Settling Party’s share of liability, at the same time admitting that the State did not provide any evidence supporting its judgment or information for the court to independently confirm the Settling Parties’ entitlement to de minimis contributor status. Accordingly, the Ninth Circuit held that the district court failed to substantively assess the adequacy of the agreements and to provide a reasoned explanation for its decision. Arizona v. Raytheon, 2014 U.S. App. LEXIS 14993 at *18-19.

In support of its cursory substantive review, the district court stated in its order that it would not second guess ADEQ, holding it was required to defer to a state agency’s judgment unless it was arbitrary and capricious. The Ninth Circuit disagreed, stating that district courts should not give the same deference to a state agency, such as ADEQ, as that afforded federal agencies regarding the interpretation of federal laws such as CERCLA. Accordingly, the Ninth Circuit held that the district court in this case erred by deferring to the state’s judgment to the same decree as it would have a federal agency. The majority’s opinion expressly holds that while courts may give “some deference” to a state agency’s environmental expertise regarding issues within the scope of that expertise, the state agency is not entitled to deference concerning its interpretation of federal law, including CERCLA’s mandate. Arizona v. Raytheon, 2014 U.S. App. LEXIS 14993 at *24. The precise level of deference to be afforded a state was left undefined by the Ninth Circuit, but is to be assessed by the district court on a case by case basis and may vary from state to state. In the end, however, the Ninth’s Circuit’s decision did not turn on the deference issue, as the Court made it clear that even if the EPA had been a party to the proposed consent decrees at issue, its ruling would have been the same as the district court failed to adhere to the Montrose requirement to “independently scrutinize” the agreements at issue regardless of whether entered by a federal or a state agency.

The Arizona v. Raytheon decision is notable for its unequivocal affirmation of its nearly two decades old opinion in Montrose, but even more so for its enunciation that the required “independent scrutiny” of a settlement must now take into consideration the appropriate level of deference to be afforded the agency proponent of the consent decree at issue. Non-settling PRPs who oppose entry of a consent decree may rely on this opinion to challenge whether a district court engaged in the required Montrose analysis, including an independent substantive evaluation of the respective liabilities of the settling parties in light of their contribution to remedial costs, demanding even more stringent standards for evaluation in cases of state-sponsored settlements commensurate with a particular state agency’s entitlement to deference. As a result, the Arizona v Raytheondecision provides additional support to non-settling parties seeking to challenge entry of CERCLA settlement agreements sponsored by state agencies and, on the flip side, requires significantly more effort to be expended by settling parties to present evidence sufficient to convince the court, after independent evaluation, that their agreements should be judicially approved.