The decision could make it easier to recover from the government for CERCLA response costs at former defense production facilities and shift leverage in settlement discussions.

On October 4, a panel of the US Court of Appeals for the Ninth Circuit held in TDY Holdings v. United States that the US government must pay a share of the cleanup costs under the Comprehensive Environmental Response, Compensation, and Liability Act (CERCLA) at a site that produced equipment for the US military. The court therefore reversed and remanded a district court decision allocating 100% of the costs to TDY. The Ninth Circuit held that the district court had erred by failing to properly consider two analogous Ninth Circuit precedents that had allocated all response costs to the government. The Ninth Circuit also held that the district court had failed to consider adequately the government’s significant involvement at the TDY site, including its requirements that TDY use certain hazardous substances and its agreement to cover TDY’s environmental compliance costs.

Background

TDY operated a manufacturing plant in California from 1939 to 1999 that produced aircraft and aircraft parts for the US military’s war efforts, including avionics systems and components of the Apache helicopter. The government, which was its primary customer, was extensively involved at the site, supervising operations, inspecting products, and mandating particular processes and cleaning procedures. The government also owned equipment at the site, including drilling machines, vapor degreasers, and transformers. And, during the plant’s operation, the government agreed to reimburse TDY’s costs of complying with environmental laws.

Operations at the site released compounds that were later designated as “hazardous substances” under CERCLA and other environmental laws, including (1) chromium compounds; (2) chlorinated solvents; and (3) polychlorinated biphenyls (PCBs). In 2007, TDY entered into a settlement with the San Diego Unified Port District that required it to respond to contamination at the site. TDY then sought contribution from the US Government for these response costs under Section 113 of CERCLA.

The US District Court for the Southern District of California held the government liable under CERCLA as a former owner because it had owned equipment at the site where the hazardous substances were discharged. But the district court nonetheless allocated a zero percent share of the response costs to the government, concluding that TDY’s “role as the Site operator” rendered it responsible for all past and future costs of remediating the contamination.

The Ninth Circuit’s Decision

In an opinion authored by Judge Morgan B. Christen for the majority of a three-judge panel, the Ninth Circuit reversed and remanded the district court’s decision, holding that the district court had committed two errors:

• First, the district court erred in its application of two binding Ninth Circuit precedents, United States v. Shell Oil Co., 294 F.3d 1045, 1053 (9th Cir. 2002) and Cadillac Fairview/California, Inc. v. Dow Chem. Co., 299 F.3d 1019 (9th Cir. 2002), which placed all CERCLA response costs at former defense manufacturing sites on the government. The district court had found those cases inapposite because in both cases the government had taken a particularly comprehensive and controlling role at the sites involved. But the Ninth Circuit noted that there were many similarities between the government’s role at TDY’s plant and its role in Cadillac Fairview and Shell Oil, including that: (1) the work involved substances known in later years to be hazardous; (2) the government required the use of those hazardous substances; and (3) the contamination was a result of production for the benefit of the United States’ war effort. In light of those similarities, the Ninth Circuit concluded that it was error for the district court to take a “180 degree departure” from Cadillac Fairview and Shell Oil by placing all of the response costs on TDY.

• Second, the district court erred in its assessment of the relationship between TDY and the government and the parties’ respective actions. The Ninth Circuit again noted that the government had required the use of hazardous substances, and the court observed that TDY had taken steps to modify its operational practices to reduce contamination from those substances once their hazards were better understood in the 1970s. The court also noted that the government had contracted to pay for environmental costs at the site, including CERCLA cleanup costs, while the plant was operating. The court held that this contracting history was a relevant factor in the allocation of CERCLA costs because “TDY may have continued to enter into contracts with the government in reliance on its expectation … that its CERCLA cleanup costs would be reimbursed, or at least shared.”

Judge Paul J. Watford issued a concurring opinion agreeing with the majority that it was an error to allocate 100% of the cleanup costs to TDY. But he wrote separately to express his view that “the record does support something close to” such an allocation.

Implications

The Ninth Circuit’s decision to reverse the district court’s allocation was significant, particularly given that allocations of response costs under CERCLA are subject to an abuse of discretion standard. Section 113 of CERCLA authorizes district courts to “allocate response costs among liable parties using such equitable factors as the court determines are appropriate.” Cadillac Fairview, 299 F.3d at 1025. Thus, the Ninth Circuit concluded that, even though the district court may choose what factors to consider in an allocation and how to weigh those factors, it had clearly erred by holding that TDY must bear 100% of the response costs.

It will be interesting to see how the district court applies the Ninth Circuit’s opinion on remand. The majority opinion opened the door to an allocation of all or a significant share of the costs to the government based on the government’s role at the site and its contracting history. While Judge Watford’s concurrence suggested that the district court could still allocate the “lion’s share” of liability to TDY, that view was not adopted by the two-judge majority of the court.

The Ninth Circuit’s decision is likely to have implications for other former defense manufacturing sites, at which a number of potentially responsible parties (PRPs) are currently pursuing or may choose to pursue CERCLA claims against the US government. The opinion will be particularly useful to PRPs who were directed to use hazardous substances by the government or who contracted with the government for reimbursement of their environmental costs. In addition to being potentially useful in litigation against the government, the decision could also help PRPs at formers defense sites achieve favorable outcomes through settlement.