Chemical Manufacturers and Distributors Face Increased Exposure to California Agency Cost-Recovery Actions Under Broad Causation Standard

A recent ruling by the California Court of Appeal may have some hazardous substance manufacturers concerned that they could more frequently be the target of cost recovery actions by California agencies who have remediated redevelopment sites.  In City of Modesto et al., v. The Dow Chemical Company et al., 19 Cal.App.5th 130 (2018) (“City of Modesto”), the court expanded on an earlier holding that the Polanco Redevelopment Act (Cal. Health & Saf. Code § 33459 et seq.) (“Polanco Act”) should be construed in accordance with the principles of nuisance.  On a previous appeal in the litigation, the court ruled that in keeping with nuisance principles, liability under the Polanco Act is not limited to those who directly participate in or have control over discharges but also includes those who assist in creating the pollution.  The key evolution in the law now is the court’s determination that the substantial factor test—which can be met with circumstantial rather than direct evidence—is the proper standard for causation under the Polanco Act.   As the court observed, “The substantial factor standard is a relatively broad one, requiring only that the contribution of the individual cause be more than negligible or theoretical.”  City of Modesto at *20.  This broad test may make it easier for agencies to recover from manufacturers, whose connection to contaminated sites is otherwise remote or attenuated—and more difficult for those manufacturers to dispose of Polanco Act claims on summary judgement.

In this case, the City of Modesto, the Modesto Sewer District No. 1 and the Modesto Redevelopment Agency filed the original complaint back in 1998, naming 28 defendants, including various dry cleaners operating in Modesto, the manufacturers of dry cleaning equipment, and manufacturers and distributors of dry cleaning solvent.  The plaintiffs alleged that the defendants caused PCE contamination to the City’s groundwater, sewer system, and soil of certain property, and sought recovery for past, present and future costs of investigation and contamination remediation under the Polanco Act.  The complaint also asserted causes of action for negligence, products liability, trespass and nuisance.

The Polanco Act authorizes redevelopment agencies to remediate contaminated property, including private property, located in a redevelopment area, and then to recover the costs of cleanup from responsible parties.  This authority was expanded to California city and county agencies in 2014 under the Gatto Act after the legislature dissolved redevelopment agencies in 2012.  (Cal. Health & Saf. Code § 25403.5(a)).  The Polanco Act defines “responsible party” by reference to two other laws: (1) the Hazardous Substances Account Act, which incorporates CERCLA’s definition of “covered persons” (Cal. Health & Saf. Code § 25323.5(a)(1); 42 U.S.C. § 9607(a) (providing for strict liability for “covered persons,” which includes site owners, site operators, and arrangers and transporter of hazardous waste disposal)); and (2) the Water Code section 13304(a) which provides that any person who “has caused or permitted, causes or permits, or threatens to cause or permit waste to be discharged or deposited where it is, or probably will be, discharged to the waters of the state and creates, or threatens to create, a condition of pollution or nuisance” shall be responsible for remedial action (Cal. Health & Saf. Code § 33459(h); Cal. Wat. Code § 13304).  Only the latter definition was at issue in City of Modesto, as the plaintiffs did not contend that the manufacturer defendants met the CERCLA definition of “covered persons.”

Over the 14 years of litigation leading up to a final judgment, several defendants settled, leaving only two dry cleaners, one PCE distributor and equipment manufacturer, and two PCE manufacturers, Dow Chemical Company and Axiall Corporation.   These defendants moved for summary adjudication under the Polanco Act, on the basis that their remote actions did not constitute or cause a discharge into state waters.  The trial court granted their motions on the grounds that plaintiffs had not proven that the defendants either directly participated in or exercised authority or control over on-site activities or disposal activities at Modesto dry cleaners.

Plaintiffs appealed, and it was at this point that the California Court of Appeal reversed and remanded with instructions that the Polanco Act should be construed in harmony with the principles of nuisance.  According those these principles, direct participation in or control is not required; liability also extends to those who assist in creating the nuisance.  City of Modesto at *14. The court further determined that the plaintiffs’ evidence showed that the manufacturer defendants had provided the dry cleaners with instructions to set up equipment in a way that led to discharge of water containing PCE into drains and sewers, and that defendants had instructed dry cleaners through Material Safety Data Sheets to flush large spills to the ground and mop up and bury small spills.

On remand, defendants successfully argued that plaintiffs needed to present direct evidence of each link in the causal chain to meet the standard of causation: (i) the manufacturers provided and the dry cleaner received specific instruction; (ii) the dry cleaner acted on the instruction; and (iii) the action caused the contamination at the site.  Id. at *15-16.  Plaintiffs again appealed, asserting that the trial court erred in applying this stringent standard of causation to the Polanco Act claims.  The Court of Appeal again agreed.

Significantly, on appeal the court determined that the proper test for causation under the Polanco Act is the substantial factor test.  This causation standard does not require the direct proof on each link in the chain of causation advocated for by defendants to the trial court, but it requires more than merely placing hazardous substances into the stream of commerce without adequate warning of the dangers of improper disposal, which is the standard advocated for by plaintiffs.  Id. at *18-19.  Instead, the substantial factor standard can be met by introducing evidence that provides a reasonable basis for the conclusion that it was more likely than not that the defendant’s conduct was a cause in fact of the result.  Id. at *21.

The case is now on remand to resolve the question of liability utilizing the substantial factor test.

The ruling makes clear the statutory exposure for manufacturers and distributors of the hazardous substances driving clean-up activity in the state (i.e. VOCs, metals)—and in particular, those manufacturers who provided disposal advice to users of their products in a pre-environmental law era.  However, the reach of the ruling and what conduct (in addition to providing improper equipment and disposal instructions) may qualify as an act assisting in the creation of the nuisance is yet to be seen.  Until the courts define the outer limits of causation under the Polanco Act, we may see agencies leveraging the uncertainty to encourage manufacturers facing a cost-recovery action under the statute to settle more readily.  Going forward, it will be important for manufacturers and distributors to implement policies that are mindful of liability exposure created downstream, and to avoid any conduct that could be construed as affirmatively contributing to, creating, or permitting hazardous waste contamination.  The California environmental lawyers at Bick Law LLP will continue to closely monitor the implications of the Polanco Act developments to manufacturers, distributers, and other industry groups.