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State Laws Boost Incentives For NRD Claims Against Industry, Attorney Says

June 29, 2018

A growing number of states are expanding what natural resource damages (NRD) recovery funds can be used for, giving incentives to states short on funds to pursue such claims in order to pay for general fund state needs -- as they had previously done in litigation against tobacco companies, says a legal expert on the issue.

"[N]ow that these state statutes are coming along allowing natural resource damage recoveries under state law to be used for general fund purposes, there's much more of an incentive to bring these actions to collect money for the general revenue pot," said James Bruen, an attorney with Farella Braun & Martel, June 22.

Bruen made the remarks in a presentation, "The Gorilla in the Closet: Natural Resource Damages," at the American Law Institute -- Continuing Legal Education's Environmental Litigation 2018 course in Washington, D.C.

He noted that states are currently short on funds, and passing a state law that allows NRD recoveries to go to states' general revenue funds could potentially generate a fair amount of money, he said.

In particular, he pointed to a Minnesota law that has been updated in recent years and allows for NRD recoveries to go into a general remediation fund for a variety of expenses.

Under Minnesota law, if a trustee brings an NRD claim, "instead of using the money exclusively to 'restore, replace or acquire equivalent resources'," as federal Superfund law requires, "the trustee puts it into a fund with other recoveries from the state, and they can use the monies to do" other things, he said.

Bruen said when he first saw this, he was concerned it "changes the entire field." He said if a state through an NRD claim can make money for the general treasury to pay for those needs, that will "change the dynamic . . . of this legal area to make it much more like tobacco litigation."

In a follow-up interview, he explained that in the tobacco company settlements years ago, states settled for large sums, but many times did not use those monies to address health issues related to tobacco consumption but rather directed it into a general revenue fund for the state.

Bruen noted in the interview that there are other states besides Minnesota that have expanded their NRD law in terms of how funds are spent, but Minnesota has one of the broader laws in terms of what it can spend the recoveries on.

For example, several states including Louisiana, New Jersey, California and Maryland, allow for outside attorneys to be hired on a contingency basis.

In the case of one settlement, New Jersey agreed to pay outside lawyers $40 million stemming from its $225 million settlement with Exxon Mobil.

In addition, then-Gov. Chris Christie (R) inserted language into a 2014 budget bill that temporarily capped NRD settlements at $50 million, which meant any remaining Exxon settlement funds were directed to the general fund.

But the state legislature subsequently proposed a constitutional amendment that would require all environmental settlements to be dedicated to a special fund -- located in the general fund -- to finance environmental restoration projects.

Such an approach is generally consistent with federal Superfund law, which requires that any NRD recoveries be used to "restore, replace or acquire equivalent natural resources."

In the interview, Bruen pointed for instance to Minnesota's Feb. 20 NRD settlement with 3M for $850 million for damages to the environment and health of residents exposed to per- and polyfluoroalkyl substances that 3M manufactured.

He pointed to a chart the state's pollution control agency released on the settlement that shows the largest apportionment from the settlement -- $125 million -- went to outside counsel. Other portions went to the "general portion" of the state's remediation fund, while some did go to natural resource damage-related work, the chart says. But, he said his point is that the diagram shows funds going to expenditures that are typically funded by general revenue, as compared to what is allowed under federal NRD law.

Bruen also warned of the high costs industry parties could see under common law tort claims that are sometimes filed as companion litigation to NRD suits. While these have always been available, the use of these is becoming more common, he said in the interview. The tort claims, which for instance can be for negligence, nuisance and trespass, are filed by state attorneys general (AGs), rather than state trustees, for NRD, he said in his presentation. These claims can be limitless, he cautioned.

He noted several reasons why a state AG might file a common law claim for NRD. First, many state AGs prefer to bring a suit in state court, while potentially responsible parties sued for NRD would prefer to go to federal court where they believe they are more likely to get "a carefully researched opinion," he said.

Second, states that win a state court common law recovery suit can place those funds in the state's general fund, and do not have to use the money to address NRD, he said.

The third reason "is a huge deal," as common law recoveries can include recovering for punitive damages that have no limit, he said. He noted that a Supreme Court case that limited punitive damages to no more than nine times that of compensatory damages does not apply to environmental claims.

Therefore, the Supreme Court's 2003 ruling in State Farm Mutual Automobile Insurance Company v. Campbell, et al. does not apply to NRD claims and there is no limit, he said. As a consequence, "it's a big deal to have these companion tort claims filed against you. The rules are different," he added.

In the interview, he also pointed to a 2017 article by Eric Klein and Grahma Zorn, with the law firm Beveridge & Diamond, where the authors cite a potential new era of litigation marked by Washington state's tort lawsuit against polychlorinated biphenyl (PCB) manufacturer Monsanto over alleged injuries to the state's public natural resources -- water bodies.

"Tort claims may support relief not available under a state's environmental regulatory authority," the authors say in the article. Bruen says the use of common law in this case shows that states are being inventive. -- Suzanne Yohannan
