Amidst the disruption caused by the coronavirus pandemic (but not specifically relating to it), the Department of Justice has announced a major shift in policy towards settling environmental cases. DOJ, and EPA along with it, will no longer offer settling defendants the option of undertaking supplemental environmental projects in lieu of paying penalties to the United States.
Supplemental environmental projects (or “SEPs,” as they are commonly called) are environmentally beneficial projects or activities not required by law that a defendant agrees to undertake as part of the settlement of an enforcement action. For example, a manufacturing facility which emitted excess pollutants into the air might agree to retrofit old diesel school buses with pollution reducing technology to reduce exhaust emissions from those buses going forward. In exchange, the government could, in its discretion, seek a lesser civil monetary penalty (paid to the government) than it otherwise would. The prior practice, laid out in a 2015 EPA memo, was that up to 80% of the estimated cost of the SEP could be credited against the civil penalty assessed.
Settling defendants have sought out SEPs on the belief that they can reduce the total payment a defendant must make, although some industry lawyers have questioned whether that is actually true in practice. SEPs have also been popular because many defendants feel that projects with concrete environmental benefits, which can be publicized and presented as contributing to a healthy environment, provide greater reputational benefits with the public than a payment to the government.
But DOJ will no longer pursue SEPs in settlement negotiations, as directed by a new memo by Jeff Clark, Assistant Attorney General of the Environment and Natural Resources Division (the “Memo”). Critically, the Memo is more than an announcement of prosecutorial discretion: It also “construe[s] . . . governing sources of law” regarding settlement agreements, meaning that it takes the position that SEPs are generally unauthorized absent further congressional action. Indeed, the Memo undertakes a lengthy analysis and concludes that SEPs are forbidden by the Miscellaneous Receipts Act, 31 U.S.C. § 3302, which requires any federal officer receiving funds on behalf of the United States to deposit them in the Treasury. Memo at 1. Because SEPs “divert cash” that the United States would otherwise receive in the form of penalties to “third parties” receiving the benefit of the environmental project, they also undermine Congress’ exclusive authority to determine how to spend federal funds. Id. at 1, 3. The result is that the change in settlement policy would be harder for a subsequent administration to undo, absent an alternate legal justification.
SEPs have been subject to increasing scrutiny in recent years. Indeed, AAG Clark’s Memo is the latest in a series of DOJ memoranda questioning the authority of the federal government to accept relief besides payment of fines into the treasury without specific statutory authority to do so. See August 21, 2019 Memo and June 5, 2017 Memo. In part, this is because SEPs (1) “by definition . . . go beyond what is required under federal, state, or local laws,” 2019 Memo at 1; (2) represent a vehicle that the executive branch could potentially use 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,” id.; and (3) often involved “payments to various non-governmental, third party organizations . . . [which] were neither victims nor parties to the lawsuits,” 2017 Memo.
Eliminating SEPs represents a major shift, and will significantly alter settlement negotiations going forward. As the Memo acknowledges, “the regulated community . . . and many within the Executive Branch remain fond of SEPs,” and they were extremely common, and sometimes prominent, features of environmental settlements. Id. at 16.
One key question going forward is how the elimination of SEPs will affect the scope of permissible mitigation in settlements. We may see an expansion of what constitutes acceptable mitigation activities as an attempt to fill the hole created by the disappearance of SEPs. Mitigation—the idea that a settling defendant must offset the environmental harm it caused—is a distinct legal concept from a SEP unaffected by AAG Clark’s recent Memo. Mitigation must be more tightly tied to the defendant’s harm than a SEP must be. In practice, however, what constitutes mitigating conduct versus conduct that could only be authorized by a SEP can be unclear. EPA has acknowledged, for example, that “the same type of activity could constitute mitigation in one case and a SEP in another.” Opportunity exists for defendants to advocate for similar beneficial projects to SEPs under the theory that they are required to mitigate the harm caused.
AAG Clark’s Memo is directed to DOJ, and does not directly address administrative settlements pursued by EPA itself. However, an EPA spokesman has said that “EPA will no longer include SEPs in administrative settlement agreements” in light of the Memo. It remains to be seen whether the policy will have any trickle down effects to state environmental enforcement, where analogues to the Miscellaneous Receipts Act may not exist. California, for example, expressly provides legislative authority for SEPs, so the practice should continue in that state notwithstanding the change at the federal level.