The Nickel Report

A new policy directive issued earlier this week by the Department of Justice (Justice) has raised concern among regulated industry that the availability of Supplemental Environmental Projects (SEPs) in civil settlements could be severely reduced, or even largely eliminated.  If the directive is applied to restrict the availability of SEPs, it would remove a useful, and at times powerful, tool routinely used by the regulated community to negotiate acceptable settlement agreements in civil enforcement actions. It could also eliminate tens of millions of dollars of annual funding of such projects—which typically benefit local communities or address niche environmental issues—currently provided through the use of SEPs in consent decrees.  Because applicable policies preclude Justice from requiring parties to include SEPs in settlements, it is difficult to identify any upside in any potential narrowing or elimination of SEPs as an optional tool to assist in the resolution of civil environmental enforcement actions.

On June 5, Attorney General Sessions issued a memorandum—Prohibition on Settlement Payments to Third Parties—to all component heads and US Attorneys at Justice, including the Environment and Natural Resources Division (the June 5 Memo). The June 5 Memo includes the following directive to all Justice attorneys:

It has come to [the Attorney General’s] attention that certain previous settlement agreements involving the Department included payments to various non-governmental, third-party organizations as condition of settlement with the United States. These third-party organizations were neither victims nor parties to the lawsuits.

The Department will no longer engage in this practice. Effective immediately, Department attorneys may not enter into any agreement on behalf of the United States in settlement of federal claims or charges, including agreements settling civil litigation … that directs or provides for a payment or loan to any non-governmental person or entity that is not a party to the dispute.

This directive applies to settlements (including civil settlement agreements, deferred prosecution agreements, nonprosecution agreements and plea agreements) across the spectrum of federal law enforcement. In the environmental enforcement context the directive, at a minimum, appears to narrow the scope of acceptable SEPs in civil settlement agreements negotiated by Justice. However, depending on how broadly the June 5 Memo is interpreted and implemented by ENRD, it could largely terminate the option of using SEPs to reduce civil penalties in judicial settlements.

The US Environmental Protection Agency (EPA) issued formal guidance in February 1991 allowing for the use of SEPs in the settlement of civil environmental actions. EPA has taken the position that SEPs further the federal goal of protecting and enhancing public health and the environment. The policy has been updated several times, most recently in 2015 when EPA issued a memo titled Issuance of the 2015 Update to the 1998 U.S. Environmental Protection Agency Supplemental Environmental Projects Policy (SEP Policy). ENRD attorneys at Justice have generally followed the SEP Policy in negotiating settlements in civil environmental enforcement actions.

Under the SEP Policy, an alleged violator could voluntarily agree to undertake an environmentally beneficial project—provided it was related to the alleged violation—in exchange for mitigation of the penalty to be paid. The amount of penalty mitigation available via the use of SEPs varies depending upon the circumstances, but generally the use of an SEP can significantly reduce the amount of a penalty paid to the US Treasury (although, the cost of settlement goes up for the alleged violator because payments for SEPs do not translate—dollar for dollar—into penalty mitigation). In fiscal year 2016, EPA civil settlements included approximately $32 million in commitments for the performance of SEPs.

The SEP Policy already prohibits penalty mitigation credit for “[c]ash donations to community groups, environmental organizations, state/local/federal entities, or any other third party” because such payments risked the appearance of a diversion of penalty funds in violation of the Miscellaneous Receipts Act, 33 U.S.C. § 3302(b). Therefore, the June 5 Memo does not change the already existing prohibition on making donations to third-party groups in return for penalty mitigation.

If, however, the June 5 Memo’s prohibition on “directing or providing” payment to any third-party entity not a party to the enforcement action is interpreted by ENRD to extend to the performance of work on a third party’s behalf or to a third party’s benefit, the use of SEPs would largely be foreclosed in settling civil environmental cases. Under such an interpretation, the scope of acceptable SEPs would be severely limited. Under this scenario, it would appear that the only SEPs that would still be acceptable would be those that involve payments to, or projects for, government entities (including local and state entities) or projects conducted at an alleged violator’s own facilities above and beyond existing environmental compliance requirements.

Even without a broad interpretation, the June 5 Memo appears likely to preclude a number of SEPs that would previously have been acceptable. Some SEPs previously adopted in consent decrees or provided as illustrations of acceptable SEPs in EPA’s SEP Policy (and other EPA publications) would appear to run afoul of the June 5 Memo because they require cash payments to uninvolved third parties:

• Purchasing renewable energy credits (RECs) from power providers or green tag brokers;
• Purchasing and managing a watershed area (from a private third party) to protect a drinking water supply;
• Paying third parties to remove or mitigate contaminated materials, such as asbestos and lead-based paints, from third-party-owned properties;
• Providing funding to moderate- and low-income residential property owners to repair privately owned sewer pipes; and
• Funding a community air monitoring project, if implemented by nongovernmental organizations.

As illustrated above, it is not unusual for an SEP to require an alleged violator to fund environmental projects to be performed by third parties or to use funds to purchase credits or make other similar environmentally beneficial investments. Absent further guidance from Justice, the June 5 Memo appears to prohibit SEPs with these characteristics.

Within days of the Attorney General’s issuance of the June 5 Memo, interested parties have already reached out to the Acting Assistant Attorney General of ENRD asking for detailed guidance on how the new policy will impact the use of SEPs in the settlement of civil environmental enforcement matters. Until such guidance is issued, or future illustrative settlements incorporating acceptable SEPs are approved by Justice, parties should be aware that the use of SEPs in civil settlements may face new scrutiny and additional limitations.