DOJ Announces Another Nail in Supplemental Environmental Projects’ Coffin

Vinson & Elkins LLP
Ronald J. Tenpas, Carrick Brooke-Davidson and Conrad Bolston

September 3, 2019

The Department of Justice (“DOJ”) will no longer use Supplemental Environmental Projects (“SEPs”) in settlements with states and municipalities as a result of a policy change announced August 21, 2019.1 The change follows a series of steps taken since 2017 curtailing SEPs. It may foreshadow future action to formally curtail SEPs in settlements with private sector parties, as the memo notes that the Department is actively reconsidering current guidance that continues to allow SEPs in settlements with private parties.2 Even without a formal change to private party settlements, companies should expect increased difficulty in incorporating SEPs in negotiated settlements and, if engaged currently in negotiations, should consider accelerating those negotiations if inclusion of a SEP is a critical priority.

 Background

SEPs are projects that defendants agree to undertake to improve the environment but are not required for on-going compliance with existing regulatory requirements. They often are included in negotiated consent decrees as part of reducing the penalty that would otherwise be required. SEPs have historically been commonly used in both settlements negotiated by DOJ to resolve court cases and by EPA in resolving administrative penalty cases. Notwithstanding this historic use, the DOJ is now abandoning SEPs in settlements with states and municipalities (such as settlements with municipalities that operate stormwater and sewer systems where discharges have violated the Clean Water Act).

The announcement is the latest in a recent series of DOJ actions curtailing the use of settlements in which third parties receive payments in lieu of such payments being deposited as fines in the U.S. Treasury. On June 5, 2017, Attorney General Jeff Sessions issued a memorandum announcing a general prohibition on DOJ entering into settlements that require defendants to make a payment to third parties.3 Attorneys in the environmental community immediately recognized that this prohibition would have implications for environmental settlements that included SEPs, as third parties were frequently used to implement SEPs. In January 2018, DOJ issued a policy further explaining circumstances under which third-party payments were permissible.4 In November 2018, this was followed by general DOJ guidance applying to all consent decrees with state and local governmental entities, which directed that a “consent decree must not be used to achieve general policy goals or to extract greater or different relief from the defendant than could be obtained through agency enforcement authority or by litigating the matter to judgment.”5

Rationale for Change

In explaining the change DOJ noted, and credited, several longstanding criticisms of SEPs. Specifically, DOJ echoed concerns from some legislators that SEPs violate the separation of powers by acting as de facto appropriations, thereby sidestepping Congress’s exclusive constitutionally-based appropriation authority. The memorandum also notes that such settlements can effectively undermine state and local legislative processes, in essence allowing a “forced appropriation” through a settlement that includes SEP.6 The memorandum also concludes that SEPs inherently overstep the EPA’s authority, as SEPs typically “extract greater or different relief [from a state or local government] than could be obtained through agency enforcement authority or by litigating the matter to judgment.”7 Finally, DOJ further explained its conclusion that SEPs were not implicitly endorsed through recent amendments to the Clean Water Act and noted recent legislative attempts to eliminate SEPs wholesale.

What This Means for You

For now, the change applies only to state and local governmental entities. However, both DOJ’s recent actions relating to SEPs and language in the SEP Policy suggest that DOJ may take additional steps that further curtail or eliminate the use of SEPs in settlements with private sector parties. DOJ’s rationale for the change is broadly applicable to SEPs even where the defendant is not a state or municipality, and the new SEP Policy advises that DOJ is “considering revocation of (or revisions to) the January 2018 memorandum to make it more closely adhere to the November 2018 Policy and its connection to the legislative aims of the Stop Settlement Slush Funds bill [which would have prohibited third-party payments in all private party settlements, including SEPs].”8

To the extent that DOJ takes further action to curtail SEPs, private parties negotiating settlements with DOJ will have less flexibility because of DOJ’s new approach. However, it is unclear just how much the new policy will impact the EPA’s use of SEPs in administrative settlements where DOJ is not involved, although it could be substantial. DOJ’s previous policies relating to SEPs stated that the policies were binding on EPA where DOJ approval was required for an administrative enforcement action and settlement. DOJ approval is typically needed if EPA seeks administrative penalties higher than statutory thresholds that are typically well under $500,000, such as provisions of sections 113(d)(1) and 205(c)(1) of the Clean Air Act, or if violations being resolved are more than a few years old.

Another aspect that remains unclear for private party settlements is whether the policy will affect mitigation projects that are expected to directly remedy the precise harm that an environmental violation has caused. Such projects, unlike SEPs, are arguably relief that the government could obtain through litigation or administrative enforcement. The new policy does not discuss such mitigation projects and whether they would be prohibited if the mitigation required a third-party payment to be completed. Moreover, in practice, the line between a mitigation project and a SEP can be difficult to discern and, in at least one notable case involving Harley-Davidson, DOJ has applied the prohibition on payments to third parties to a proposed settlement involving a mitigation project.

The reduced use of SEPs and, potentially, mitigation projects may over time result in settlements requiring higher financial penalties to be paid to the U.S. Treasury, rather than allowing a company to achieve a mix of financial penalty paired with a SEP commitment. Companies should continue to monitor the issue, be cognizant of what components of a settlement are available to DOJ and EPA and, in particular, assess whether any on-going negotiations would be affected through further policy changes.

This article is being provided for informational purposes only and not for the purposes of providing legal advice or creating an attorney-client relationship. You should contact an attorney to obtain advice with respect to any particular issue or problem you may have. In addition, the opinions expressed herein are the opinions of Mr. Tenpas, Mr. Brook-Davidson and Mr. Bolston and may not reflect the opinions of Synergy Environmental, Inc., Vinson & Elkins LLP or either of those firms’ clients.

 

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