In August 2019, the U.S. Department of Justice's Environment and Natural Resources Division (ENRD) issued a memorandum curtailing the use of supplemental environmental projects (SEPs) in consent decrees and settlement agreements with state and local governments. I wrote about that memorandum at the time. In March, ENRD issued a follow-up memorandum, extending the prohibition on SEPs to all enforcement cases involving civil settlements with private defendants.

SEPs, which permit a defendant to undertake an environmentally beneficial project in lieu of paying penalties—or in exchange for reduced penalties—have been seen as benefiting defendants, enforcement agencies and communities at the same time. SEPs have given enforcement agencies and defendants additional flexibility in negotiating consent decrees and settlement agreements, while also providing communities potentially affected by violations with public benefits. ENRD's policy will foreclose the Justice Department—and the EPA—from including these projects in settlements in which the Justice Department is representing the EPA.

Such projects still have a place in Pennsylvania. Pennsylvania's state corollary to SEPs, Community Environmental Projects (CEPs), are unaffected by ENRD's new policy. The Pennsylvania Department of Environmental Protection (PADEP) has continued to include CEPs in crafting settlements, although ENRD's new policy will have implications for enforcement and settlements involving federal environmental statutes.

How Did We Get Here?

With SEPs seemingly popular with regulators, the regulated community and local communities receiving the benefits of SEPs, the question becomes: why would the Justice Department take this action?

When the Trump administration first addressed the viability of SEPs, it found that SEPs were allowed. The attorney general addressed settlement payments to third parties more generally in a 2017 memorandum. The attorney general directed the Justice Department not to enter into settlements that provide payment to a non-party. In response to the attorney general's guidance document, ENRD noted in its own guidance document that the attorney general's policy does not prohibit the inclusion of SEPs in settlements, so long as the SEP meets the requirements of the EPA's SEP policy, which already prohibits all third-party payments. ENRD's treatment of SEPs would change rapidly, though.

That guidance document was issued in January 2018. In August 2019, ENRD issued its guidance prohibiting the use of SEPs in consent decrees and settlement agreements with state and local governments. ENRD relies on another Justice Department document from 2018 providing guidance on consent decrees with state and local entities. That guidance document outlines substantive requirements mostly aimed at curbing federalism concerns, but notes that a consent decree may not be used "to extract greater or different relief from the defendant than could be obtained through agency enforcement or by litigating the matter to judgment." Although ENRD's policy limits the flexibility of state and local entities to enter consent decrees and settlement agreements by eliminating the use of SEPs, ENRD reasons that the prohibition actually "promotes respect for local democratic processes" because it prevents such entities from committing to projects that may be "contrary to the express or implied will" of legislative branches.

ENRD's March 2020 guidance necessarily adopts different reasoning to extend its prohibition of SEPs to consent decrees and settlement agreements with private defendants. Jeffrey Bossert Clark, assistant attorney general of the Environment and Natural Resources Division of the U.S. Department of Justice, reasons that SEPs are likely in violation of the Miscellaneous Receipts Act, which provides that a government official "receiving money for the Government from any source shall deposit that money with the Treasury," subject to certain exceptions. As Clark explains, the EPA and other agencies have relied on the rationale that because no penalty is owed to the government until a settlement is finalized, including a SEP into a settlement agreement does not trade penalties for projects.

Clark does his best to distance the Justice Department from SEPs, explaining that its attitude toward SEPs has always been "ambivalent" and that EPA has been the "core driver" of their use.  Although ENRD noted as recently as 2018 that an SEP that complies with the EPA's SEP policy would not run afoul of the department's guidance on settlement payments to third parties, ENRD now does its best to attack that same policy.

The EPA's SEP policy has avoided violating the Miscellaneous Receipts Act in a number of ways, the most pertinent of which relates to payment of penalties. The EPA explains in its policy that "SEPs are not penalties, nor are they accepted in lieu of a penalty." Therefore, any settlement that includes an SEP must also include a penalty, and the EPA establishes minimum penalty requirements. The EPA allows for penalty mitigation due to the performance of an SEP, based on strict criteria contained in the policy document.

ENRD finds that, despite the safeguards contained within the EPA's SEP policy, SEPs still divert funds that otherwise would have gone to the Treasury to projects benefiting third parties, in violation of the law. Although ENRD acknowledges that the EPA's policy curbs "the most serious violations of the law," SEPs still go beyond what is within the attorney's prosecutorial discretion into what may be a violation of the Miscellaneous Receipts Act.

What's Next for SEPs and CEPs in Pennsylvania?

Eliminating the use of SEPs will have several likely outcomes. First, a party negotiating a settlement that would include a SEP when this policy was announced may now face a significant barrier to reaching agreement. Although the policy does not affect those settlements already executed, those parties in the midst of settlement discussions are out of luck. Second, settling parties will assuredly pay more going forward, given that SEPs can result in a discounted payment by a paying party. That discount—and the resulting loss of money to the Treasury—is what ENRD's policy is designed to eliminate.

SEPs still survive, just not in the context of enforcement actions in which the Justice Department is representing the EPA. The EPA may still include SEPs in administrative settlements. There has been no indication by the EPA that it will eliminate the use of SEPs in that context. In addition, federal settlements that include settlement of state law claims—which include a state version of an SEP—will also be allowed. There still might be a future for SEPs that is more expansive, which could come with a change in administration. Clark's memorandum certainly leaves the window open. Despite the expansive argument contained in the memorandum, he does acknowledge that SEPs "violate the spirit, if not the letter, of the Miscellaneous Receipts Act." An administration in favor of SEPs may find the value of SEPs outweighs the concerns expressed in Clark's memorandum.

In addition to the narrow situation in which state supplemental projects are included in federal settlements settling state law claims, Pennsylvania's version of the SEP, the Community Environmental Project (CEP), should be unaffected by the Justice Department's recent memorandum. CEPs provide the PADEP with the ability to include CEPs in settlements of violations of the Clean Streams Law, the Air Pollution Control Act, and the Solid Waste Management Act.  PADEP revised its guidance regarding use of CEPs in 2014. That guidance generally tracks the guidelines provided by the EPA.

A recently as last month, PADEP announced a settlement that included a CEP. The consent order and agreement addressed violations of an operator's erosion and sediment control authorizations at unconventional natural gas sites. PADEP announced the settlement and CEP in a press release, stating that "in lieu of collecting a civil penalty, the DEP has accepted [the operator's] proposal for streambank stabilization and the installation of fish habitat structures, in addition to correcting and remediating the damage from the violations."

Given PADEP's continued use of CEPs—the above-mentioned project is not the only project included in a settlement this year—supplemental projects should continue to provide benefits to Pennsylvania's communities while affording the regulated community flexibility to address violations of Pennsylvania environmental laws. That same flexibility will not be available when facing federal enforcement absent an Administration change. Regulators, both PADEP and the EPA, will have to give additional thought as to how to address violations going forward. ENRD's policy may push the EPA toward pursuing more administrative settlements in order to retain the flexibility and community benefit of SEPs, unless the EPA itself moves to eliminate the use of SEPs altogether. PADEP will have similar considerations as it considers violations of both state and federal environmental laws. Although supplemental projects still have a place in certain settlements, ENRD's policy will certainly add another barrier to regulated entities seeking to resolve violations going forward.

Caleb J. Holmes, a shareholder at Greenberg Traurig, focuses his practice on environmental and commercial litigation. He has a wide range of experience in environmental transaction and regulatory counseling matters. He represents businesses in state and federal courts in environmental and commercial litigation matters. Contact him at [email protected].