Read the full article by Edward B. Witte (National Law Review)
“Environmental lawyers and consultants remember Feb. 14, 2019, as the day the U.S. Environmental Protection Agency (EPA) delivered a heart shaped box of promised regulatory actions called the PFAS Action Plan. It was a much anticipated, and to some, overdue response to per- and polyfluoroalkyl substances (PFAS). However, as Forrest Gump said about a box of chocolates, ‘you never know what you’re going to get.’ The PFAS Action Plan has provided little aid to, and actually a few impediments in, the field of environmental due diligence in business transactions.
Highlights of the article:
- What the PFAS Action Plan promised
- Developments since the PFAS Action Plan
- CERCLA hazardous substances in environmental due diligence
- Current practices regarding PFAS due diligence
- How PFAS comes up in transactions
- Litigation risks loom
- Best practices for addressing PFAS in deals
- Key takeaways
What the PFAS Action Plan promised
A cornerstone commitment of the EPA’s PFAS Action Plan was listing two of the most widely studied PFAS, perfluorooctane sulfonate (PFOS) and perfluorooctanoic acid (PFOA), as hazardous substances under the federal Comprehensive Environmental Response, Compensation and Liability Act (CERCLA) or, as it’s more commonly known, Superfund.
The more obvious anticipated effects of the as-yet unfulfilled listing of any PFAS as a CERCLA hazardous substance would be empowering government agencies and third parties to clean up PFAS-contaminated sites and then sue the party responsible for the PFAS contamination to reimburse the cost of the cleanup. A CERCLA listing for PFOS and PFOA could also mean that responsible parties would need to cover the costs of providing a drinking water supply and repairing damage to natural resources caused by PFOS and PFOA for which they are responsible.
The consequences of listing PFAS as a CERCLA hazardous substance may represent a case of “be careful what you wish for.” In particular, the specter of revisiting or reopening sites, including once-federally listed Superfund sites that were closed by federal or state action, could be particularly troubling.
Developments since the PFAS Action Plan
Since the announcement of the PFAS Action Plan in Feb. 2019, the U.S. Congress has introduced multiple pieces of proposed PFAS-related legislation. This legislation includes the PFAS Action Act (H.R. 535), which the U.S. House of Representatives passed on Jan. 10, 2020. The PFAS Action Act would require the designation of PFOA and PFOS as hazardous substances under CERCLA within one year of enactment. It would further require the EPA to determine whether to designate all PFAS as hazardous substances within five years of enactment and publish its determination with 60 days of its final decision.
So far, however, legislation like H.R. 535 that calls for the designation of PFOS, PFOA and/or all PFAS as hazardous substances remains in the U.S. Congress. A recently enacted legislation, The National Defense Authorization Act (NDAA), which was signed into law in December 2019, contains multiple PFAS-related provisions, but falls short of providing a mechanism to compel clean-up of PFOS or PFOA via designation as a hazardous substances under CERCLA.
CERCLA hazardous substances in environmental due diligence
A more nuanced effect of a CERCLA hazardous substance listing of PFAS would be in the area of environmental due diligence in real estate and business transactions. Environmental due diligence is the process of evaluating the current and historical use and ownership of a property to ascertain the possible presence of a ‘release’ of hazardous substances. Forty years after the passage of CERCLA, the American Society of Testing and Materials (ASTM) International Standard E1527-13 Phase I Environmental Site Assessment (Phase I) process remains the gold standard for environmental due diligence.
However, it is the interplay between industry-standard environmental due diligence using the ASTM Phase I process and the unfulfilled PFAS Action Plan promise to list certain PFAS as CERCLA hazardous substances that is making environmental professionals uneasy.
A party that completes an ASTM Phase I, and thereby meets the CERCLA ‘all appropriate inquiry’ standard1, potentially qualifies for EPA sanctioned exemptions from liability, including as an “innocent purchaser,” as a “bona fide prospective purchaser” or as a party affected by an off-site discharge. These qualifications on liability are particularly critical in high profile redevelopments of brownfields, the term used for properties that are tainted and stigmatized by the real or perceived presence of hazardous substances.
Parties to deals with potentially contaminated real estate such as buyers and their lenders have embraced the ASTM Phase I process because it reduces or eliminates the uncertainty of environmental costs and liability—and environmental uncertainty is a sure fire way to scare away buyers in a transaction and their lenders as well as developers and municipalities considering brownfield redevelopments.
So the fact that PFAS, or even two of the approximately 5,000 PFAS that are more well-known, such as PFOA and PFOS, are not CERCLA hazardous substances has a particular significance for environmental due diligence under ASTM practice. This is because the purpose of an ASTM Phase I is to identify “recognized environmental conditions,” a term that ASTM limits to CERCLA hazardous substances and petroleum. Therefore, the unwary user/buyer of a Phase I who otherwise wants to assess a property for the presence of PFAS will not receive such an evaluation2.
Current practices regarding PFAS due diligence
Based upon interviews with environmental consulting and engineering professionals3, the environmental professional industry has responded to this gap in ASTM Phase I coverage with a wide range of practices, policies, protocols and programmatic approaches to including PFAS in environmental due diligence.
Addressing environmental concerns outside the scope of the ASTM Phase I process is not a novelty for environmental consultants. One of the most significant environmental concerns that has fallen outside of the ASTM Phase I scope, since its inception, is asbestos. Many environmental consultants address gaps in environmental due diligence by including the consideration of asbestos—or now, PFAS—as “non-scope considerations.” Other tools that consultants can utilize to address environmental concerns that fall outside of the scope of the common Phase I process include flagging these issues, which might usually be identified in an ASTM Phase I as a Recognized Environmental Condition (REC), as “otherwise noteworthy conditions” or as ‘business environmental risks,’ under ASTM parlance.
Some environmental professionals have also managed PFAS concerns in environmental due diligence under an independent exercise that complements the ASTM process with a work deliverable to the client, sometimes in the form of a privileged communication4, identifying the findings of the PFAS-specific evaluation.
Also influencing this process is the growing, but often disparate, state regulation of PFAS in the form of groundwater and drinking water standards or limits. Many states are developing databases of sites with documented releases of PFAS, which is a valuable resource for environmental consultants performing due diligence. For example, California’s State Water Resources Control Board (SWRCB) maintains an interactive map of all locations assessing PFAS under California’s Statewide PFAS Investigation orders, and incudes links to available PFAS environmental data associated with these investigations.
The appetite for addressing PFAS in transactional environmental due diligence depends largely on the motivation of the party to the deal:
- Buyers are risk-averse and, in most cases, absolutely want to understand the possible presence of PFAS.
- Most selling parties, in contrast, have no desire to be the trailblazer and identify PFAS, because their ownership status may make them legally responsible for the contamination.
- Lenders are typically risk-sensitive, particularly where their financing is secured by an interest in property that may be contaminated. To date, however, anecdotal experience shows that the lending community has been less alarmed by PFAS than might be expected, while other investment sources (venture funding and portfolio management companies) have proven to be ahead of the PFAS curve.
- And, finally, municipalities and developers addressing brownfields have felt the chill of uncertainty that a topic like PFAS can introduce, creating significant concern of a slowdown in urban redevelopment…”