Three Questions Companies Face About SEPs and Environmental Enforcement

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Three Questions Companies Face About SEPs and Environmental Enforcement

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Bloomberg Environment

Francis X. Lyons

The Justice Department is reviewing the use of Supplement Environmental Projects in environmental enforcement actions. Schiff Hardin’s Francis X. Lyons says the Trump administration is skeptical of their use and looks at the three main questions company legal teams should have on their minds.

Companies that previously relied on ever-popular Supplemental Environmental Projects—which have been a mainstay of settling environmental enforcement actions over the last 30 years—could soon be in for a rude awakening as sweeping changes may be underway behind closed doors at the Department of Justice.

The DOJ is conducting an overarching policy review of SEPs. While it is not clear exactly which way or how far the pendulum will swing in the aftermath of this review, we can make some educated guesses. The current administration has already put a deep stake in the ground signifying its skepticism surrounding SEPs, following the recent prohibition on use of SEPS in settlements involving state and local governments.

Three Big Questions on Minds of Strategic Legal Teams

1. What does this mean for my company?

The worst-case scenario here is that SEPs become largely restricted or totally eliminated as part of federal settlements involving the DOJ. In other words, if your company finds itself as a defendant in a federal environmental enforcement action led by the DOJ, there may be a lot less flexibility in the manner in which the case is ultimately resolved and potentially greater out-of-pocket costs to resolve the matter.

SEPs formerly gave state and local governments and DOJ enforcement attorneys more leeway in determining appropriate resolution of enforcement cases, because there was the option of incorporating both civil penalties as well as these environmentally beneficial projects.

That means if a government case team had previously liked the SEPs being proposed by a company’s legal team and felt good about the benefit to the environment from the SEP, there could be a possibility for more flexibility on the civil penalty side. The SEP policy itself limits penalty mitigation to a maximum of 80 percent for every dollar spent on a SEP.

The practical reality is that over the last three decades, the enforcement process evolved from being a strictly linear one to having SEP options enter the penalty negotiation well before a civil penalty resolution was reached. And the more positive the government enforcement team feels about a potential SEP, the greater flexibility the team typically exercises in negotiating to the final penalty/SEP package.

Overall, the regulated community prefers SEPs to simply paying a civil penalty, because both the community and environment see benefits from SEPs.

2. How does this tie in with overall federal enforcement trends?

We have seen a decline in federal enforcement federal enforcement under the Trump administration, as the EPA has emphasized compliance assurance efforts and deference to state.

In 2018, Susan Bodine, assistant administrator for the EPA’s Office of Compliance Assurance, issued an interim guidance memorandum that states should be the presumptive lead enforcement authority in environmental enforcement cases.

The interim guidance came with limited exceptions, such as when a state fails to take appropriate enforcement actions, or requests that the federal government take the lead, consistent with the Trump administration’s policy of cooperative federalism. In July, this interim guidance was replaced by a final policy to enhance cooperation between states and the EPA in civil enforcement and compliance assurance work, which re-affirms the principle that the EPA will generally defer to states as the primary lead enforcement authority.

Regardless of the current SEP policy review result, this development in itself has and continues to mean fewer SEPs, since they are largely driven by federal enforcement.

The current administration also emphasizes compliance assistance, which many perceive as a less rigorous federal enforcement program. And into this void—real or perceived—steps the non-governmental-organizations (NGOs) and creative private citizens, who are increasingly active in initiation or threatening to initiate citizen suits, in which they stand in the shoes of the state or federal government regulators.

Savvy companies understand that as a general principal, when a government actor brings an enforcement action, the goal is to bring the defendant into a state of compliance with the law, repair of any injury to the environment as a result of the non-compliance, recoupment of any economic benefit resulting from the violations alleged, and a strong deterrent message sent to other would-be violators.

In the case of a citizen’s suit, the goals and motivations may be similar, but that is not always the case. Sometimes the motivation of a citizen suit may simply be to initiate or hasten the closure of a targeted facility.

However, if there is a change in administration after 2020, chances are excellent that the next administration could look more favorably on SEPs and once again allow them in settlements with state and local governments. These have been widely used in both Republican and Democratic administrations, so there is decent bipartisan support for the use of SEPs.

3. Will the DOJ review of SEPs affect federal non-judicial administrative enforcement actions?

In a word, no. At this point, it appears that the SEPs policy review is limited to the DOJ, and thus, the recent curtailment of SEPs in matters involving state and local governments applies only to matters where the DOJ is involved.

It’s unclear how long the DOJ will take to complete its review of the SEP policy and what further changes may come. Case teams involving federal non-judicial administrative settlements brought by EPA enforcement case teams in the absence of a referral to the DOJ may continue to use SEPs as they have in the past.

But these administrative cases are limited in the amount of civil penalty that government enforcement teams may seek—absent a waiver from the DOJ—so continued use of SEPs in administrative cases by their very nature will involve lower value SEPs.

It remains to be seen if the broad policy review currently underway at the DOJ at some point spawns a similar review at the EPA. But for now, the regulated community, NGOs, and communities that stand to benefit from SEPs will await the results of the DOJ review. And strategic legal teams are likely already in discussions with their outside counsel to discuss options and closely monitor these ongoing developments.

Originally published on Bloomberg Environment.