Tdy Holdings, LLC v. United States

FOR PUBLICATION
UNITED STATES COURT OF APPEALS
FOR THE NINTH CIRCUIT
TDY HOLDINGS, LLC; TDY No. 15-56483
INDUSTRIES, LLC,
Plaintiffs-Appellants, D.C. No.
3:07-cv-00787-
v. CAB-BGS
UNITED STATES OF AMERICA;
UNITED STATES DEPARTMENT OF ORDER AND
DEFENSE; ASHTON B. CARTER, in his AMENDED
official capacity as Secretary of OPINION
Defense,
Defendants-Appellees.
Appeal from the United States District Court
for the Southern District of California
Cathy Ann Bencivengo, District Judge, Presiding
Argued and Submitted May 8, 2017
Pasadena, California
Filed October 4, 2017
Amended March 20, 2018
Before: J. Clifford Wallace, Morgan Christen,
and Paul J. Watford, Circuit Judges.
Order;
Opinion by Judge Christen;
Concurrence by Judge Watford
2 TDY HOLDINGS V. UNITED STATES
SUMMARY*
CERCLA
The panel reversed the district court’s judgment in favor
of the United States in an action brought by a plaintiff
military contractor under the Comprehensive Environmental
Response Compensation and Liability Act (“CERCLA”),
seeking contribution from the government for its equitable
share of the cleanup costs of plaintiff’s aeronautical
manufacturing plant located in San Diego, California.
CERCLA imposes strict liability on potentially
responsible parties (“PRP”) for the cleanup costs of an
environmental hazard. Plaintiff and the federal government
were PRPs for the cleanup at issue, and plaintiff argued that
the district court abused its discretion when it allocated all of
the cleanup costs to plaintiff.
The panel rejected plaintiff’s suggestion that the district
court erred by misconstruing the concept of “fault,” or
misunderstanding CERCLA’s strict liability statutory scheme.
The panel further held the district court did err, however, in
its analysis and application of the two most on-point
decisions – United States v. Shell Oil Co., 294 F.3d 1045
(9th Cir. 2002), and Cadillac Fairview/California, Inc. v.
Dow Chem. Co., 299 F.3d 1019 (9th Cir. 2002) – that
considered how CERCLA cleanup costs should be allocated
between military contractors and the federal government.
The panel held that the district court erred in concluding that
*
This summary constitutes no part of the opinion of the court. It has
been prepared by court staff for the convenience of the reader.
TDY HOLDINGS V. UNITED STATES 3
Shell Oil and Cadillac Fairview were not comparable, and in
allocating zero percent of clean-up costs to the government,
particularly in light of the parties’ prior course of dealings
and the government’s requirement that plaintiff use two of
the hazardous chemicals at issue. The panel remanded for
additional proceedings.
Judge Watford concurred. He agreed that the record did
not support allocating 100% of the clean-up costs to plaintiff,
but in his view the record did support something close to that.
COUNSEL
Randall M. Levine (argued), Douglas A. Hastings, David B.
Salmons, and Bryan M. Killian, Morgan Lewis & Bockius
LLP, Washington, D.C.; James J. Dragna, Morgan Lewis
Bockius LLP, Los Angeles, California; for Plaintiffs-
Appellants.
Rachel E. Heron (argued), Dustin J. Maghamfar, Mark A.
Rigau, Lewis M. Barr, Ellen J. Durkee, Aaron P. Avila, and
Jennifer Scheller Neumann, Attorneys; Eric Grant, Deputy
Assistant Attorney General; Jeffrey H. Wood, Acting
Assistant Attorney General; Environment and Natural
Resources Division, United States Department of Justice,
Washington, D.C., for Defendants-Appellees.
Eric B. Wolff, Alexander M. Fenner, and Mark W. Schneider,
Perkins Coie LLP, Seattle, Washington; Shane R. Swindle,
Perkins Coie LLP, Phoenix, Arizona; for Amicus Curiae
National Defense Industrial Association.
4 TDY HOLDINGS V. UNITED STATES
ORDER
The opinion filed on October 4, 2017, and appearing at
872 F.3d 1004, is amended as follows. On page 13 of the slip
opinion:
Replace the sentence reading with
Replace the sentence reading with
Replace the sentence reading
with
An amended opinion is filed concurrently with this order.
With this amendment, the panel has unanimously voted
to deny Appellees’ petition for panel rehearing filed on
January 19, 2018.
The petition for panel rehearing is DENIED. No further
petitions for en banc or panel rehearing shall be permitted.
OPINION
CHRISTEN, Circuit Judge:
Plaintiffs-Appellants TDY Holdings, LLC, TDY
Industries, LLC, and its predecessor, the Ryan Aeronautical
Company (collectively, TDY), operated a forty-four-acre
aeronautical manufacturing plant located in San Diego,
California, from 1939 to 1999. TDY derived between 90 and
99 percent of its business from military contracts with the
U.S. government. Over time, certain chemical substances
used in the course of manufacturing operations were released,
contaminating the soil and groundwater in and around the
plant and requiring TDY to incur substantial remediation
expenses. In 2007, TDY filed a complaint under the
Comprehensive Environmental Response Compensation and
Liability Act (CERCLA), seeking contribution from the
government for its equitable share of the cleanup costs. After
a twelve-day bench trial, the district court granted judgment
6 TDY HOLDINGS V. UNITED STATES
in favor of the United States, allocating 100 percent of past
and future CERCLA costs to TDY and zero percent to the
government. TDY appeals from the district court’s judgment.
We have jurisdiction under 28 U.S.C. § 1291. Because
we conclude the facts of this case do not justify the district
court’s sharp deviation from our previous case law, we
reverse and remand.
I. BACKGROUND
A. Factual History
The Ryan Aeronautical Company, later known as TDY,
opened a manufacturing plant near the San Diego Airport in
1939. During World War II, it manufactured aircraft and
aircraft parts for the war effort. More recently, it
manufactured aeronautical products including drones, Apache
helicopter components, and avionics systems for the U.S.
military. The site closed in 1999 after Northrop Grumman
purchased TDY’s Ryan assets and moved the site’s
operations elsewhere.
During the sixty years in which TDY operated the
manufacturing plant, the United States was TDY’s primary
customer; 99 percent of the work conducted at the site
between 1942 and 1945, and 90 percent of the work in the
following years, was done under contract with the U.S.
military. From 1939 to 1979, the United States also owned
some of the equipment at the site pursuant to government
programs intended to finance and oversee the construction
and outfitting of government-owned industrial facilities
leased to private companies. This equipment included
TDY HOLDINGS V. UNITED STATES 7
drilling machines, an electrical substation, vapor degreasers,
and transformers.
Three hazardous substances were released during the
course of manufacturing operations, contaminating the soil
and the groundwater in and around the site. These substances
were: (1) chromium compounds used to impart corrosion
resistance on aluminum aircraft parts; (2) chlorinated solvents
used to degrease parts and tools; and (3) polychlorinated
biphenyls (PCBs) used to provide plasticity and durability to
certain materials. In some cases, military specifications in the
government’s contracts with TDY required the use of
chromium compounds and chlorinated solvents to ensure a
proper quality product. Following the passage of the Clean
Water Act and other environmental laws in the 1970s, these
substances were listed as “hazardous substances” requiring
remediation under CERCLA. Between the early 1970s and
1999, TDY billed the government for the “indirect costs” of
environmental remediation and compliance with federal and
state environmental laws, including costs incurred cleaning
up storm drains at the plant and PCB contamination of nearby
Convair Lagoon. The government paid these costs. After
more stringent standards were instituted, the California
Regional Water Quality Control Board issued a new cleanup
order requiring TDY to assess and remediate waste
discharges at the site. To comply with the order and other
state directives issued after operations at the plant ceased in
1999, TDY incurred over $11 million in response costs.
B. Procedural History
The San Diego Unified Port District brought CERCLA
claims against TDY in June 2004. The United States was not
a party to that litigation. In March 2007, TDY and the Port
8 TDY HOLDINGS V. UNITED STATES
District entered into a settlement agreement providing, in
part, that TDY would respond to the release of hazardous
substances at the site. On April 30, 2007, TDY filed a
complaint against the United States, the United States
Department of Defense, and the Secretary of Defense,
seeking contribution under 42 U.S.C. § 9613(f)(1) from the
government for past and future response costs incurred by
TDY in remediating hazardous waste released from the site.
The complaint also sought declaratory relief establishing that
the government was wholly liable for remediation costs. The
government counterclaimed for contribution from TDY.
TDY filed a motion for partial summary judgment seeking a
declaration that the United States was liable as a “past owner”
of facilities, one of four categories of potentially responsible
parties (PRPs) under CERCLA. The district court granted
TDY’s motion on July 15, 2011. TDY stipulated to its own
liability as a PRP, and the case was transferred and set for
trial on TDY’s allocation claim.
The district court held a twelve-day bench trial on
equitable allocation in April 2012. It heard testimony from
twenty-seven witnesses and admitted over 1800 exhibits. The
district court held that: (1) TDY was liable as an owner of
facilities and the operator of the site because it managed,
directed, and conducted operations resulting in the release or
disposal of hazardous waste, and implemented decisions
regarding compliance with environmental regulations; and
(2) the introduction of the three contaminants at issue was
attributable not to the government but instead to TDY’s
storage, maintenance, and repair practices, as well as spills
and drips that occurred in the manufacturing process.
After reviewing the totality of the circumstances,
including the “Gore Factors” that courts sometimes refer to
TDY HOLDINGS V. UNITED STATES 9
when considering equitable allocation of costs,1 the district
court concluded that the most important factors for equitable
allocation in this case were “the contribution and involvement
of each party in the discharge, release or disposal of
hazardous material and . . . the care exercised by the parties
with respect to the materials concerned.” The court
“consider[ed] the respective roles of the parties as defined by
CERCLA, and then how[,] in the context of these roles[,]
each party contributed to the contamination.” The court
concluded that, “[g]iven the nature of the contamination, . . .
TDY’s role as the Site operator, responsible for the handling,
storage and disposal of the contaminants at issue in this case,
is the most relevant factor in allocating costs.” The district
court allocated 100 percent of past and future response costs
for the remediation of chromium, chlorinated solvents, and
PCBs to TDY.
1
The Gore Factors are: “(1) the ability of the parties to demonstrate
that their contribution to a discharge, release or disposal of a hazardous
waste can be distinguished; (2) the amount of the hazardous waste
involved; (3) the degree of toxicity of the hazardous waste involved;
(4) the degree of involvement by the parties in the generation,
transportation, treatment, storage, or disposal of the hazardous waste;
(5) the degree of care exercised by the parties with respect to the
hazardous waste concerned, taking into account the characteristics of such
hazardous waste; and (6) the degree of cooperation by the parties with
Federal, State, or local officials to prevent any harm to the public health
or the environment.” Kerr-McGee Chem. Corp. v. Lefton Iron & Metal
Co., 14 F.3d 321, 326 n.4 (7th Cir. 1994).
10 TDY HOLDINGS V. UNITED STATES
II. DISCUSSION
A. Standard of Review
We review for an abuse of discretion the equitable factors
that a district court considers in allocating CERCLA costs
and review for clear error the allocation according to the
selected factors. Boeing Co. v. Cascade Corp., 207 F.3d
1177, 1187–88 (9th Cir. 2000); see Cadillac
Fairview/California, Inc. v. Dow Chem. Co., 299 F.3d 1019,
1025 (9th Cir. 2002) (“Under section 113 of CERCLA, the
district court ‘may allocate response costs among liable
parties using such equitable factors as the court determines
are appropriate.’” (quoting 42 U.S.C. § 9613(f)(1))); see also
NCR Corp. v. George A. Whiting Paper Co., 768 F.3d 682,
702 (7th Cir. 2014) (“[T]he district court must decide what is
relevant based on the record as a whole; an allocation based
on otherwise permissible factors will not be rescued if it does
not explain why the court has chosen to disregard other
apparently relevant information.”).
B. CERCLA Cost Allocation Claim
“Congress enacted CERCLA in 1980, as amended by the
Superfund Amendments and Reauthorization Act of 1986
(SARA), Pub. L. No. 99-499, 100 Stat. 1613, ‘in response to
the serious environmental and health risks posed by industrial
pollution.’” Chubb Custom Ins. Co. v. Space Sys./Loral, Inc.,
710 F.3d 946, 956 (9th Cir. 2013) (quoting Burlington N. &
Santa Fe Ry. Co. v. United States, 556 U.S. 599, 602 (2009)).
CERCLA “imposes strict liability on four categories of
potentially responsible parties (PRPs), for the cleanup costs
of an environmental hazard, even if the person did not
contribute to the contamination.” Id. at 956–57 (footnote
TDY HOLDINGS V. UNITED STATES 11
omitted). The four categories of PRPs are: (1) a past owner
or operator of a facility; (2) an owner or operator of a facility;
(3) an arranger of waste disposal; or (4) an entity that accepts
waste for treatment or disposal. United States v. Shell Oil
Co., 294 F.3d 1045, 1053 (9th Cir. 2002); see 42 U.S.C.
§ 9607(a). Once a PRP is found liable, it may sue other PRPs
for contribution to remediation costs under 42 U.S.C.
§ 9613(f). Earlier proceedings established that both TDY and
the government are PRPs, and those determinations are not on
appeal. Instead, TDY argues that the district court abused its
discretion when it allocated all of the cleanup costs to TDY.
TDY’s principal arguments are that: (1) the district court
failed to appreciate that CERCLA is a strict liability statute
and instead allocated liability according to relative “fault”;
(2) the government’s role as an “owner” rather than an
“operator” should not have been a dispositive factor in the
court’s cost allocation; and (3) the government should bear a
greater share of response costs because it specifically
required that TDY use the hazardous substances that
necessitated remediation before the hazardous nature of the
substances was known.
At the outset, we reject TDY’s suggestion that the district
court erred by misconstruing the concept of “fault,” or
misunderstanding CERCLA’s strict liability statutory scheme.
The district court’s use of the word “fault” was in the context
of its application of the Gore Factors, specifically factors (3)
and (5), which respectively concern the degree of the parties’
involvement in the generation or disposal of hazardous waste
and the degree of care that the parties took with respect to the
waste. The district court’s consideration of these factors was
appropriate, particularly in light of its finding, supported by
the record, of the evolving awareness of the hazardous nature
of the chemicals at issue, and TDY’s adaptation to more
12 TDY HOLDINGS V. UNITED STATES
stringent environmental standards over time. Nor did the
district court abuse its discretion by considering the
significance of the government’s role as “owner” rather than
“operator” in its analysis of the Gore Factors. The court
expressly recognized that an earlier proceeding established
the government’s liability under CERCLA as an owner of
equipment at the site, see TDY Holdings, LLC v. United
States, 122 F. Supp. 3d 998, 1015 (S.D. Cal. 2015), but held
the government’s total absence from the site during the last
twenty years of its operation relevant to the parties’
differential contribution to the release of hazardous waste
under the first Gore Factor. We hold there was no error in
this.
The district court did err, however, in its analysis and
application of the two most on-point decisions from our
court: Shell Oil and Cadillac Fairview. The government
characterizes these cases as “outliers,” but they are binding
circuit authority. Both cases considered how CERCLA
cleanup costs should be allocated between military
contractors and the U.S. government. Shell Oil Co. and Dow
Chemical Co. incurred liability while producing products
essential to the military’s efforts in World War II. See Shell
Oil Co., 294 F.3d at 1049; Cadillac Fairview, 299 F.3d at
1022. TDY also served the military during World War II and
in subsequent conflicts. Like Shell Oil Co. and Dow
Chemical Co., TDY’s work involved the use or generation of
hazardous substances known by the government—at least by
the 1970s—to be environmental contaminants. See Shell Oil
Co., 294 F.3d at 1051; Cadillac Fairview, 299 F.3d at
1022–23; see also 1972 Clean Water Act, 33 U.S.C.
§§ 1251–1387; 1976 Toxic Substances Control Act,
15 U.S.C. §§ 2601–2692. Significantly, in all three cases the
government either required the use of the hazardous
TDY HOLDINGS V. UNITED STATES 13
substances to ensure the final product met quality standards,
or mandated that production proceed in a certain manner to
increase output, resulting in the generation of hazardous
waste. See Shell Oil Co., 294 F.3d at 1050; Cadillac
Fairview, 299 F.3d at 1022–23. In Shell Oil and Cadillac
Fairview, we affirmed district court judgments allocating 100
percent of cleanup costs to the government and emphasized
that the contractors’ costs were “properly seen as part of the
war effort for which the American public as a whole should
pay.” Shell Oil, 294 F.3d at 1060; see also Cadillac
Fairview, 299 F.3d at 1029.
Despite the similarities between this case, Shell Oil, and
Cadillac Fairview, the district court concluded that Shell Oil
and Cadillac Fairview were not comparable and allocated
zero percent of clean-up costs to the government. We agree
that some deviation from the allocation affirmed in Shell Oil
and Cadillac Fairview was warranted by distinguishing facts.
First, as the district court recognized, the government exerted
more control over day-to-day operations in Shell Oil and
Cadillac Fairview than it did here, and in Cadillac Fairview
the government contractually agreed to indemnify its
contractor for its cleanup costs. 299 F.3d at 1026. The
district court’s findings that the government was not an
“operator” of TDY’s site in San Diego; that government-
owned equipment had been removed or sold to TDY twenty
years before TDY ceased operations at the site; and that
TDY’s own repair and maintenance practices caused the
contamination, justify the district court’s ruling that TDY
should bear some of the cleanup costs. Nor did the district
court err by determining that industrial operations undertaken
for the purpose of national defense, standing alone, did not
justify allocating all costs to the government.
14 TDY HOLDINGS V. UNITED STATES
Nevertheless, encumbering a military contractor with
100 percent of CERCLA cleanup costs that were largely
incurred during war-effort production was a 180 degree
departure from our prior case law, and the out-of-circuit
authority that the district court relied upon does not warrant
such a sharp deviation. This is particularly true because, as
TDY correctly argues, the government’s contracts with TDY
required the use of two of the three chemicals at issue
beginning in the 1940s, when the hazardous nature of the
substances and the need to take precautionary steps to
minimize their release were unknown. The district court
found that TDY complied with prevailing environmental
standards at that time, and responded to new regulations in
the 1970s by modifying its operational practices to reduce
environmental contamination. The court’s acknowledgment
of the evolving understanding of environmental
contamination caused by these chemicals, and TDY’s prompt
adoption of practices to reduce the release of hazardous
chemicals into the environment once the hazards became
known, further undercuts the decision to allocate 100 percent
of the costs to TDY.
In addition, the district court did not consider adequately
the parties’ lengthy course of dealings in which the
government repeatedly agreed to share in TDY’s
environmental cleanup costs from this site. In contracts from
the 1970s to 1999, the government paid between 90 and 100
percent of the environmental cleanup costs that arose from
TDY’s San Diego Plant. Despite this history, the district
court reasoned that a shift away from our prior case law was
warranted because “[m]any industries incur expenses as a
result of environmental compliance obligations and pass
those costs on to their customers. . . . [but a] consumer who
pays a business’s recycling fee as part of the invoice for his
TDY HOLDINGS V. UNITED STATES 15
car’s oil change is not acknowledging responsibility for
remediation expenses if that company discharges oil or other
pollutants into the environment.” We agree with the district
court that a customer’s willingness to pay disposal costs
incorporated as cost overhead cannot be equated with a
willingness to foot the bill for a company’s unlawful
discharge of oil or other pollutants. But the cleanup expenses
largely paid by the government prior to 1999 cannot be fairly
analogized to costs incurred in implementing measures to
comply with heightened environmental standards. Indeed,
TDY may have continued to enter into contracts with the
government in reliance on its expectation, based on its
decades-long course of dealings with the government, that its
CERCLA cleanup costs would be reimbursed, or at least
shared. The parties’ prior course of dealings concerning
cleanup costs from the same site constitutes a relevant factor
in the allocation analysis. See NCR Corp. v. George A.
Whiting Paper Co., 768 F.3d 682, 702 (7th Cir. 2014).
We are mindful that this appeal comes to us under an
abuse of discretion standard, and that the district court has
broad discretion in allocating costs among PRPs. See Boeing
Co., 207 F.3d at 1187. We further acknowledge that
important distinctions exist between the present case and
Shell Oil and Cadillac Fairview, where the government
exercised more control over production than it did here. See,
e.g., 299 F.3d at 1026 (finding that the government exercised
“unfettered control” over the contracting company’s
operations). But the analogy relied upon by the district court
cannot bear the weight of such an extreme departure from our
prior case law, particularly in light of the parties’ prior course
of dealings and the government’s requirement that TDY use
two of the hazardous chemicals at issue. Accordingly, we
16 TDY HOLDINGS V. UNITED STATES
reverse the district court’s judgment and remand for
additional proceedings consistent with this decision.
REVERSED and REMANDED
WATFORD, Circuit Judge, concurring:
I agree with my colleagues that the record does not
support allocating 100% of the clean-up costs to TDY. In my
view, though, the record does support something close to that.
The district court found that TDY was solely responsible
for the acts that led to the environmental contamination at
issue here. Those acts consisted primarily of TDY’s
employees’ failure to clean up drips and spills of chromium,
chlorinated solvents, and PCBs, along with the employees’
careless storage and disposal practices, all of which allowed
the chemicals to seep into the soil and groundwater beneath
the plant. The district court found that these aspects of the
plant’s day-to-day operations were solely under TDY’s
control; they were not controlled or directed by the
government.
TDY doesn’t challenge these factual findings on appeal.
Its sole contention is that, despite these findings, the
government should still bear all or most of the liability for
cleaning up the site because the contamination occurred while
TDY was performing government defense contracts. TDY is
right that the government must be required to foot at least a
portion of the bill. But I agree with TDY on that score only
because, as the court notes, the government required TDY to
use two of the three chemicals (chromium and chlorinated
TDY HOLDINGS V. UNITED STATES 17
solvents) at a time when neither TDY nor the government had
any reason to know that these chemicals were hazardous. Of
course, because the government did not know of the hazards
posed by the chemicals, it can’t be faulted for failing to warn
TDY. But equity demands that the government bear at least
some responsibility for having required an unsuspecting
contractor to use chromium and chlorinated solvents in the
first place. As far as the record discloses, those are chemicals
TDY might have chosen not to use if left to its own devices.
(I see no reason to disturb the district court’s allocation of
clean-up costs with respect to contamination caused by PCBs,
since the government did not require TDY to use PCBs.)
That the government must, as a matter of equity, be
allocated some share of the clean-up costs does not mean that
its share must be substantial. TDY suggested at oral
argument that the district court would abuse its discretion on
remand if it failed to allocate at least 50% of the clean-up
costs to the government. I don’t think that’s right, given the
district court’s unchallenged factual findings. The court
found that the government was innocent in requiring use of
chromium and chlorinated solvents, and that the actions of
TDY’s employees caused the contamination as part of plant
operations solely under TDY’s control. In light of those
findings, the court remains free on remand to allocate the
lion’s share of liability to TDY. It just has to allocate some
portion of the clean-up costs to the government to reflect the
government’s role in mandating the use of chromium and
chlorinated solvents. As long as the court does that, it retains
the discretion, within a fairly wide band, to arrive at an
equitable cost allocation.