The US Department of Justice (DOJ) Environment and Natural Resources Division has announced a major overhaul in the use of Supplemental Environmental Projects (SEPs)—a key penalty mitigation approach commonly used in settlement agreements. In an August 21, 2019 memorandum, DOJ announced that it will no longer allow SEPs as a component of settlements resolving federal claims against state and local governments. The memorandum strongly suggests that this new policy may well extend beyond settlements with states and municipalities, effectively removing what had been an important component of many environmental settlements. 

Background

SEPs are environmentally beneficial projects with a nexus to the underlying violation that defendants agree to perform to offset a portion of the penalty amount they would otherwise owe. They have long provided a means by which regulated entities, including state and local governments, could mitigate penalties associated with violations of federal environmental laws. SEPs have been undertaken by entities in many industries, including real estate development, utilities, manufacturing, and oil and gas operations. Examples of SEPs include a Maryland utility agreeing to install solar panels at schools and a community center; an oil refinery in New Jersey agreeing to install electrical hookups to minimize truck idling; a Colorado gas compression company agreeing to purchase wind power over a five-year period; and a shopping mall owner donating 24 acres of land to be used as a buffer zone adjacent to a nature reserve.

The 2019 DOJ memorandum builds on previous DOJ guidance:

• June 2017. As discussed in a previous client alert, a 2017 DOJ memorandum first cast doubt on the continuing availability of SEPs. The broad 2017 policy barred any settlement that provided for a “payment or loan to any non-governmental person or entity that is not a party to the dispute.” Since SEPs require that the regulated entity undertake a project related to—but not directly part of—the matter that led to the enforcement action, it was initially thought that SEPs may be prohibited by the 2017 DOJ policy. 
• January 2018. In January 2018, DOJ clarified in a memorandum that SEPs were explicitly carved out of the 2017 policy.
• November 2018. A November 2018 DOJ memorandum cast further doubt on the use of SEPs in certain settlements. The memorandum directed that settlements with state and local governments cannot “extract greater or different relief from the defendant than could be obtained through agency enforcement authority or by litigating the matter to judgment.” This language was widely understood to discourage (if not prevent) the use of SEPs in such settlements; the August 2019 memorandum both confirms that direction and suggests broader application.

The 2019 Memo

The August 2019 memorandum confirms that SEPs are almost entirely off limits for settlements with state and local governments.¹ A key component of DOJ’s rationale is that SEPs are not explicitly authorized by federal or state legislatures and therefore may undermine legislative prerogatives.²

While the prohibition is limited—for now—to settlements with state and local governments, much of the memorandum’s rationale would apply with equal force to settlements with other entities. The memorandum expressly warns that DOJ is “considering revocation” of the carveout of SEPs from the 2017 policy, thereby prohibiting their use. The results of a now-pending broader DOJ review will determine whether SEPs may be used in settlements with any regulated entity. 

The End of SEPs?

During the Trump Administration, DOJ has pivoted away from SEPs. For example, in July 2017, citing the 2017 policy, DOJ modified a negotiated settlement agreement in a Clean Air Act case against Harley-Davidson by removing the SEP that was part of the agreement. In light of that unusual step and the latest guidance, DOJ has signaled that regulated entities should prepare for broader unavailability of SEPs—effectively meaning less flexibility in settlement negotiations and a higher likelihood of penalty-only settlements without inclusion of alternative, project-based approaches.

SEPs have been popular among businesses for a variety of reasons. Significantly, no portion of penalties is tax-deductible; however, some portions of the cost of a SEP may be given favorable federal tax treatment under certain circumstances. Also, when properly planned with stakeholder engagement, SEPs have generated community goodwill, and many entities have preferred to have the opportunity to perform such projects in lieu of paying penalties to the Treasury. On the other hand, DOJ’s new position may be welcomed by those who view SEPs as an inappropriate way to benefit nongovernmental entities that are not parties to the dispute. Under either view, without SEPs in the toolbox, efficient resolution of violations of environmental laws will require novel and creative approaches.