The United States Environmental Protection Agency (EPA) and the State of California's Department of Toxic Substances Control (DTSC) (the Governments) appealed the decision of the United States District Court for the Eastern District of California in an action brought against Burlington Northern & Santa Fe Railway Company and Southern Pacific Transportation Company (the Railroads), and Shell Oil Company (Shell). The Governments sought to hold the Railroads and Shell liable under the Comprehensive Environmental Response, Compensation, and Liability Act (CERCLA)[1]for the cost of investigation and clean up of hazardous substances at a now defunct agricultural chemical storage and distribution facility in Arvin, California. The Railroads owned land on which a portion of the facility operated; Shell supplied and delivered some of the chemicals used at the facility.[2]Brown & Bryant, Inc. (B & B), the facility owner and operator, was no longer operational at the time of this action. Seeking to impose liability on other potentially responsible parties (PRPs) for removal of threats to groundwater from chemical contamination, EPA and DTSC each filed CERCLA actions against B & B, the Railroads, and Shell. The Railroads, in turn, sued B & B for contribution, to recover costs incurred in the cleanup.[3]

The district court consolidated the three cases, finding the Railroads liable as owners of the facility at the time of hazardous waste disposal[4]and finding Shell liable as a "person" who arranged for disposal of hazardous substances.[5]Because it found the harm was capable of apportionment, however, the district court limited the liability of each to the relatively small portion of the cleanup costs it attributed to each party, respectively. The district court apportioned liability based on complex formulas that considered many factors to determine percentages of fault attributable to each party. The Governments appealed, seeking to impose joint and several liability on the Railroads and Shell for the entire cost of cleanup. Shell cross-appealed, arguing it was not an "arranger" under CERCLA[6]and therefore was not liable for cleanup costs. The Ninth Circuit Court of Appeals reversed the district court's refusal to impose joint and several liability, although it held apportionment is available at the liability stage in a CERCLA action. The Ninth Circuit also affirmed the district court's judgment that Shell was an "arranger" and therefore liable under CERCLA.

For several decades, B & B sold chemicals to local agricultural producers. Among the chemicals in B & B's inventory were D-D and Nemagon, two soil fumigants produced by Shell that disperse throughout the soil to kill nematodes. B & B's agricultural chemical distribution business began in 1960. Originally located on 3.8 acres (the B & B parcel), the facility expanded in 1975 when B & B leased an adjacent 0.9 acre parcel (the Railroad parcel) that was jointly owned by the predecessors in interest to the Railroads. Although the Railroad parcel was primarily used for storage, both parcels (together, the Arvin site) were part of an integrated facility. Delivery trucks brought the chemicals to large storage tanks on the Arvin site. Spills were common during the transfer of chemicals from the trucks to the tanks. After a windstorm destroyed B & B's D-D storage tank, B & B used steel milk trailers to store D-D. Over time, the chemical corroded the steel storage tanks, causing chemical leakage. The Railroad parcel also became contaminated through water flow from the B & B parcel and spillage and leakage from other hazardous materials stored there.

The DTSC found B & B in violation of hazardous waste laws in 1983. Following a separate EPA investigation that demonstrated soil and groundwater contamination, the Governments initiated cleanup efforts authorized under CERCLA.[7]In 1991, EPA required the Railroads to take preventative steps such as the installation of groundwater monitoring wells. Under these facts, the district court calculated the Railroads' liability to be nine percent by multiplying the percent of the Arvin site owned by the Railroads, the length of the lease, and the percent of hazardous products attributable to the Railroad parcel, and then increasing the resulting amount fifty percent to account for calculation errors. Approximating the leakage attributable to Shell, the district court assigned Shell six percent liability and held it accountable for a corresponding six percent of the costs incurred by the Railroads in the contribution action.

In reviewing the district court's decision, the Ninth Circuit first discussed the standards of liability under CERCLA. The CERCLA regulatory scheme allows for effective responses to health and environmental threats by allowing state and federal governments to initiate hazardous waste cleanup[8]and then seek recovery of cleanup costs from PRPs.[9]Unless a party can establish a defense set out by statute,[10]this "super strict" liability statute extends liability to persons falling in one of four defined PRP categories without a showing that the PRP was negligent or caused the contamination to occur.[11]

Whether CERCLA allows liability to be apportioned among PRPs was a case of first impression for the Ninth Circuit. The court split its analysis into two parts: 1) whether apportionment of liability is valid under CERCLA, and 2) if liability can be apportioned, what standards guide apportionment. In answering these questions, the court followed other jurisdictions by borrowing from common law tort principles and the Restatement (Second) of Torts.

In determining whether liability can be apportioned under the statute, the court noted that the Ninth Circuit assigns joint and several liability when the harm cannot be divided.[12]Following the analysis in United States v. Chem-Dyne Corp.,[13]as other circuits have done, the court held apportionment among PRPs is available at the liability stage. The Chem-Dyne court reasoned that, in declining to mandate joint and several liability under section 9607(a), Congress intended common law principles of apportionment to apply, "adjusted to CERCLA as necessary."[14]

Having determined that liability can be apportioned, the court turned to the standards for apportionment and division of damages among defendants. Noting the importance of a unified federal rule to avoid "illegal dumping in states with lax liability laws,"[15]the court again followed Chem-Dyne's approach, taken from section 433A of the Restatement (Second) of Torts,[16]which allows apportionment of damages if a party can show a reasonable basis to determine the party's contribution.[17]However, the Ninth Circuit noted two important differences between the Restatement and CERCLA regarding the elements of "causation" and "harm." Because "causation" and "harm" in the Restatement are based on apportionment in negligence cases, they required slight modification to comport with CERCLA's strict liability scheme.

Regarding causation, the Ninth Circuit noted that if, as in Chem-Dyne, a court considers liability among several direct polluters, common law causation concepts are useful for apportionment. However, these concepts are not helpful where, as here, not all of the PRPs have "caused" the pollution in the traditional sense. PRP status under CERCLA does not require involvement in hazardous waste disposal. Instead, CERCLA merely requires that PRPs have some connection to the harm (which varies depending on the particular statutory PRP provision).[18]The court then substituted "a nexus concept that depends on the particular PRP provision applicable," meaning a PRP can only establish that apportionment is available by demonstrating that some portions of the contamination are not traceable to the connection between the PRP and the contaminated area.

Regarding the harm element, the court noted that harms under CERCLA do not correlate to traditional "harms," such as injury to individuals. CERCLA's primary purpose is to avert future injury rather than to compensate past injury.[19]After considering the possibility of labeling disposal or the cost of remediation as a CERCLA "harm," the Ninth Circuit held that for purposes of determining divisibility, the "harm" under CERCLA is "the contamination traceable to each defendant."[20]The court declined to include equitable factors in determining the liability of each PRP for the harm. The statute is silent on equitable factors in determining initial liability; however, a separate provision[21]that provides for contribution actions between PRPs allows courts to consider equitable factors at the contribution stage of the litigation. Although equitable considerations, such as relative fault among PRPs, are appropriate at the contribution phase, such factors are inappropriate at the objective liability phase, which distinguishes those with some connection to the contamination from those with no connection at all.

After developing this standard, the Ninth Circuit applied it to the case at hand, setting forth a two-part inquiry to determine apportionment among PRPs. First, is the harm "theoretically capable of apportionment"?[22]Second, if harm can be apportioned, is the evidence sufficient to establish "a reasonable basis for apportionment of liability"?[23]The court noted that whether the harm is actually apportionable is a question of law reviewed de novo, while whether there is sufficient evidence to establish a reasonable basis for apportionment is a question of fact reviewed for clear error. The burden of proof to establish this reasonable basis is on the party seeking allocation of liability.

The court determined no dispute existed as to whether the harm was capable of apportionment, because it was conceptually possible to trace the contamination to both the Railroads and Shell if perfect information were available. Since the harm was capable of apportionment, the court moved to the second question. Reviewing for clear error, the court examined separately, as to the Railroads and Shell, the district court's determinations that there was a reasonable basis for apportionment.

The Ninth Circuit determined that the Railroads could establish apportionment by showing that some discrete portion of the contamination on the Arvin parcel was not traceable to the Railroad parcel. The Ninth Circuit reversed the district court, holding that the district court clearly erred when it based apportionment upon the percentages of land area, time of ownership, and types of hazardous products, because the evidence presented was not sufficient to meet the Railroad's burden of proof under the "reasonable basis" test. The court held that the Railroads failed to establish a reasonable basis for apportioning liability.

With regard to land area, the court followed the lead of the Third Circuit in United States v. Rohm & Haas Co.,[24]which held that proving ownership of only a portion of the facility alone cannot justify apportionment. In the case at hand, the court noted that land area was not a good measure for apportionment because B & B carried out extensive contamination-prone operations on both the Railroad and the B & B parcels. In addition, the Railroad parcel may have contributed an unquantifiable amount to the total contamination on the property by enabling expanded business capacity, thus increasing spills and contamination. The Railroads kept no records showing the volume of spills, transfers, and leakage on each parcel, nor did they gather data on the amount of leakage that flowed from the Railroad parcel onto the B & B parcel. Percentage of landownership, therefore, was not a reasonable basis for measuring apportionment, because it would contradict no-fault land ownership liability imposed by Congress under CERCLA.[25]

Likewise, percentage of time of ownership was not a reasonable basis for apportioning liability because it assumes constant leakage and contamination transfer. Nor did the types of hazardous products stored on the property provide a reasonable basis for apportionment here, because the evidence showed that, at some point, all three chemicals were stored on the Railroad parcel. Therefore, the court held that district court clearly erred in assigning a two-thirds fraction to represent the types of hazardous products stored on the Railroad parcel.

After rejecting the district court's calculation of apportionment as to the Railroads, the court turned to the evidence available to show a reasonable basis for apportionment of Shell's liability. In determining whether to apportion Shell's liability, the court held that contamination is the relevant factor in showing the proportion of harm on the Arvin site caused by Shell chemicals. When, as in this case, multiple contaminants are present, courts require a "showing [of] a relationship between waste volume, the release of hazardous substances, and the harm at the site"[26]using relevant factors such as "relative toxicity, migratory potential, and synergistic capacity of the hazardous substances."[27]Volumetric calculations may provide an alternative means of establishing apportionment.[28]Here, however, the Ninth Circuit held that Shell's evidence, consisting of a sample of yearly shipment volumes and witness "guesses" at spillage quantities, was too speculative for the district court to have reasonably apportioned Shell's liability.[29]

Finally, the court addressed Shell's claim that it was not an "arranger" for purposes of CERCLA liability.[30]Shell posed four arguments on appeal:
1) the district court applied the wrong legal standard for an arranger under CERCLA, 2) its liability as an "arranger" was limited by the "useful product" doctrine, 3) it lacked control and ownership over the chemicals at the time of the transfers and thus could not have arranged for their disposal, and
4) the district court erred in finding that Shell contributed to groundwater contamination. The Ninth Circuit rejected all of these arguments, upholding the district court's finding that Shell was liable as an "arranger" for disposal.

The court disposed of Shell's first argument. The legal standard for arranger liability is a question of law, which the court reviews de novo. CERCLA does not define "arrange," but the Ninth Circuit recognizes two forms of arranger liability: "direct" liability (involving transactions "in which the central purpose of the transaction is disposing of hazardous wastes")[31]and a "broader" arranger liability (involving transactions "that contemplate disposal as a part of, but not the focus of, the transaction").[32]In these transactions, the arranger serves as the pollution source or manages its disposal. This was the first Ninth Circuit case to address arranger liability when the arrangers contracted for the sale of hazardous substances rather than their direct disposal. The court adopted the rule that "[a]rranging for a transaction in which there necessarily would be leakage or some other form of disposal of hazardous substances is sufficient" for liability, even if the arranger did not intend to dispose of the product.[33]

The court also rejected Shell's second argument that under the "useful product" doctrine not all manufacturers of hazardous substances are liable because such substances must be disposed of eventually after they are used as intended.[34]The court reasoned that where, as here, the product is never used for its intended purpose because the sale of the product results in leakage of hazardous substances, the useful products doctrine does not apply. The court held that because Shell arranged for delivery and transfer of its chemicals and knew that the transfer process involved some leakage, the district court was correct in assigning arranger liability to the portion of the product never employed in its intended use on agricultural fields.

Shell's third argument, that it lacked control and ownership over the chemicals at the time of the transfers and thus had not "arranged" them, also failed. The Ninth Circuit held no statutory requirement exists that the arranger own or control the hazardous wastes at the time the transaction is arranged or at the time of transfer. Pointing to the ease with which a party wishing to avoid liability could structure a transaction to avoid control or ownership at the time of disposal, the court acknowledged that ownership and control are "useful indices" of the "broader" brand of arranger liability, but are not dispositive.[35]The district court found that Shell arranged for delivery and transportation to the Arvin site, regularly reduced prices in an amount linked to loss from leakage, and distributed a manual to ensure D-D tanks were operated in accordance with its safety instructions. The Ninth Circuit held that these and other findings established that Shell exercised sufficient control over and knowledge of the transfer process to deem it an "arranger."

Finally, the court rejected Shell's fourth argument that the district court erred in determining that the company contributed to groundwater contamination. Shell contended that the chemical D-D quickly evaporates or disperses and does not remain in toxic form in the soil or percolate to groundwater. The Ninth Circuit noted that the district court's contrary determination was based on several weeks of substantial scientific and expert witness testimony, and therefore was not clearly erroneous. Having dismissed each of Shell's arguments against arranger liability, the court held Shell was liable as an "arranger" under CERCLA because it arranged for the sale and transfer of chemicals in transactions known to result in leakage, or disposal, of hazardous substances.

In summary, the Ninth Circuit held that although apportionment is possible at the liability stage of a CERCLA action, the district court erred in determining harm could be apportioned under CERCLA in this instance because there was no reasonable basis for determining the portion of harm on the Arvin site caused by the Railroads or Shell. The court also upheld the district court's finding that Shell was liable as an "arranger" under CERCLA. The effect of the court's holdings was to render the Railroads and Shell jointly and severally liable for harm at the Arvin site.[36]