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Eighth Circuit Weighs in on Superfund’s Arranger Liability And The Useful Product Doctrine

Last week, a divided Eighth Circuit in United States v. Dico, Inc., No. 14-2762 (8th Cir. Dec. 10, 2015), reversed in part a district court’s grant of summary judgment against Dico, Inc., in which the lower court found that Dico arranged for disposal of hazardous substances by selling buildings contaminated with PCBs.  In reversing the district court’s determination that Dico intended to dispose of PCBs contained in the insulation of the buildings by selling the entire buildings, the Eighth Circuit also vacated a punitive damages award but allowed civil penalties to stand. 

The significant facts of the case involve the sale of several buildings contaminated with PCBs.  Dico sold the buildings to Southern Iowa Mechanical (“SIM”) which SIM purchased with the intent to demolish in order to remove the steel and other useable materials.  SIM moved the steel beams, which were contaminated with PCBs from the insulation, to its own facility which then became contaminated by the PCBs, and disposed of all other parts of the building elsewhere.  The lower court decision holding Dico liable as an arranger, United States v. Dico, Inc., 892 F. Supp.2d 1138 (S.D. Iowa 2012), focused in large part on SIM’s intent to dismantle the buildings after the sale as well as Dico’s knowledge that disposal of PCBs would result from this demolition.  In particular, the trial court found that where reclamation is the sole useful purpose of the product being sold and necessitates disposal of the remaining parts, the seller has arranged for disposal of a hazardous substance.

In overturning the lower court, the Eighth Circuit found that the district court focused too narrowly on the value of the buildings and what the purchaser intended to do with them.  Because the buildings were not hazardous products themselves and the record did not reflect that either Dico or the purchaser viewed the buildings as “merely waste,” the Court held that the issue of Dico’s intent in selling the buildings was material and could not have  been decided at the summary judgment stage.  Instead, the majority found, the district court should have considered the overall legitimacy of the sale and whether the sale provided Dico some value other than unloading the contaminated buildings.  The Court agreed with Dico’s argument that the buildings had at least some commercial value based on which a fact finder may find that Dico did not intend to dispose of the PCBs by selling the buildings.    

In its analysis, the Eighth Circuit noted that the parties framed the issue before the court as the “useful product defense,” which prevents a seller of a useful product from being subject to arranger liability, even when the product itself is a hazardous substance that requires future disposal.  The Eighth Circuit considered the defense in light of the U.S. Supreme Court’s 2009 landmark decision in Burlington Northern & Santa Fe Ry. v. United States, 556 U.S. 599 (U.S. 2009), which provides the framework for determining when a party can be held liable as an “arranger” for the disposal of hazardous waste. 

Judge Kermit E. Bye, writing for the majority, noted that the Supreme Court’s definition of “arranger” in Burlington Northern required more than a seller’s knowledge that a sale would eventually result in disposal.  Instead, the “central question” under the Supreme Court’s definition of “arrange” is the intent of the seller in the particular transaction rather than the usefulness of the product and the knowledge of future disposal.  Notably, Judge Bye wrote that the viability of the useful product defense is “not entirely clear” in the wake of Burlington Northern since the focus is now on the intent of the seller rather than perceived usefulness of the product at issue.

The Eighth Circuit’s opinion also discussed several pre-Burlington decisions relied on by the district court, known as the “battery cracking” cases.  The district courts in those cases found that sellers “arranged for disposal” when they sold “junk” batteries to a scrap yard that was only interested in the lead within the batteries and would inevitably have to dispose of the contaminated battery casings.  The Eighth Circuit noted that the district court had relied on these cases in finding that a seller arranges for disposal when it knows the buyer will use only part of the contaminated product.  However, under Burlington, a seller’s knowledge of eventual disposal alone is insufficient to find liability as a matter of law.  Judge Bye noted that the district courts in the battery cracking cases could have considered the seller’s intent and found that the sellers were not actually selling a product but simply trying to dispose of hazardous waste.  Thus, Judge Bye appears to preserve these cases by reconciling their holdings with Burlington Northern’s focus on the intent of the seller.   

In addition to reversing the district court’s summary judgment decision on arranger liability, the Eighth Circuit also reversed the lower court’s assessment of punitive damages but allowed the civil penalties to stand.  The punitive damages and civil penalties both related to Dico’s violation of an EPA unilateral administrative order issued over ten years prior to the sale, which regulated the use and maintenance of the buildings at the site.

The $1.4 million in punitive damages were assessed by the district court in proportion to EPA’s costs for remedying the contamination caused by Dico’s failure to abide by EPA’s Order.  EPA incurred costs related to sampling and cleanup efforts only at the SIM site where the buildings were demolished.  However, only the Dico Superfund Site was actually regulated by EPA’s Order.  Thus, the punitive damages were reversed because EPA did not incur costs at a site regulated by EPA’s Order.

The court did, however, affirm the $1.6 million in civil penalties, finding that Dico violated EPA’s Order through its failure to maintain and protect the integrity of the encapsulated PCBs throughout the building teardown process.  

The two other judges on the panel both concurred in part and dissented in part with Judge Bye’ opinion, highlighting the subjective, fact-intensive nature of arranger liability under Superfund as well as the assessment of penalties in these instances.  Judge James B. Loken voiced his concern that Judge Bye placed too much emphasis on the “arranger” cases – including the “battery cracking cases” – decided before Burlington Northern, calling the cases inconsistent with current precedent.  He also disagreed with the majority’s opinion with respect to the civil penalties, arguing that the lower court abused its discretion by finding a “continuing” violation without establishing a continued release of hazardous substances.  Judge Jane Kelly concurred with the majority’s opinion regarding civil penalties, but said that she believed there was sufficient evidence that Dico has the requisite intent to dispose of the PCBs necessary to support the lower court’s finding of arranger liability.