On April 19, 2024, the Environmental Protection Agency (EPA) announced a final rule adding perfluorooctanoic acid (PFOA) and perfluorooctane sulfonic acid (PFOS) to the list of hazardous substances regulated under the Comprehensive Environmental Response, Compensation, and Liability Act (CERCLA), commonly known as the “Superfund” statute. This designation, which had been expected for several years, will allow EPA to address PFOA and PFOS contamination using its authority under CERCLA. Given the ubiquity of those substances in the environment, the regulation of PFOA and PFOS is expected to increase the number of Superfund sites across the country, increase the cost of remediating those sites, and add complications to real estate and corporate transactions. This alert will provide some background on PFOA and PFOS, and highlight some of the consequences EPA’s action is likely to have in the near future.

About PFOA and PFOS (and other PFAS compounds)

PFOA and PFOS are two of the most common per- and polyfluorinated substances (referred to collectively as PFAS). They have been widely used since the 1940s in various industries for their water and oil repellant properties, and have been featured in products ranging from non-stick cookware and water-resistant fabrics to firefighting foams and industrial processes. While PFOA and PFOS are no longer being manufactured or used in the United States, some 12,000 other PFAS substances are still being produced and can be found in a range of everyday products including food packaging, clothing, cosmetics, and toilet paper.

PFAS compounds serve a range of useful purposes due to their strength and stability. However, those same characteristics cause them to be very persistent in the environment. And, given that they have not been regulated under U.S. environmental laws until very recently, they have been discharged to streams, emitted to the air, and disposed of in landfills – legally – since the 1940s. Recent investigations have detected PFOA and PFOS at many locations across the United States, with notable concentrations at airports, military bases, landfills, and manufacturing facilities where PFOA and PFOS-containing products were used or manufactured.

What does the rule do?

The rule comes after EPA concluded that PFOA and PFOS “may present a substantial danger to the public health or welfare or the environment.” Under Superfund, the EPA and third parties can now hold the owner or operator of any location where PFOA and PFOS remediation is necessary, and any party who disposed of or arranged for the disposal of PFOA and PFOS at such location, jointly and severally liable for all costs of remediating those substances. The rule’s implementation also gives rise to a requirement to report releases of PFOA and PFOS of more than 1 pound within a 24-hour period.

In sum, this action expands CERCLA’s strict liability regime (which has imposed billions of dollars of costs on businesses and property owners over the last 45 years) to cover two new chemicals that may be found at properties all over the country. While this is concerning, there are some bits of good news for some. First, EPA issued an enforcement discretion memorandum on April 19, 2024 indicating it will focus its enforcement efforts on potentially responsible parties (PRPs) who significantly contributed to the release of PFOA and PFOS, including parties that manufactured or used PFAS in the manufacturing process, federal facilities, and other industrial parties. As of now, EPA does not intend to pursue certain PRPs, including airports, farms, fire departments, community water systems, and publicly owned treatment works. And second, the rule does not change CERCLA’s liability framework, which provides liability protections in certain circumstances for parties that are not primarily responsible. Taking measures to ensure that your business qualifies for those defenses is thus more critical than ever.

What does this mean for real estate transactions?

As of February 13, 2024, the American Society for Testing and Materials standard for Phase I environmental site assessments (Phase Is) is required to be used in order to satisfy the All Appropriate Inquiry aspect of certain defenses to liability under CERCLA. At the time the standard was issued, PFOA and PFOS were not designated as “hazardous substances” under CERCLA, and thus recent Phase Is did not need to address the potential presence of those chemicals. However, once EPA’s final rule is in effect (60 days after the rule is published in the Federal Register), environmental professionals completing Phase Is will need to consider whether PFOA and PFOS have been released (or were likely released) at the property when determining whether a Recognized Environmental Condition (REC) exists onsite. If a REC related to PFOA or PFOS contamination is identified in the Phase I, a subsurface investigation will likely be recommended as a next step in order to determine whether PFOA or PFOS is present onsite in excess of regulatory action levels. If PFOA or PFOS is found in that investigation, it could trigger reporting requirements, and possibly remediation, under CERCLA. Buyers and sellers of real estate therefore need to be aware that this issue will now arise more often in Phase I reports, complicating their transactions. Buyers will also need to re-double their efforts to ensure that they meticulously follow all of the detailed requirements necessary to preserve the “innocent purchaser” and “bona fide prospective purchaser” defenses available under CERCLA. Finally, in addition to PFOA and PFOS, buyers may wish to consider whether to proactively investigate the potential presence of certain PFAS chemicals not presently identified as “hazardous substances,” but subject to other monitoring requirements under the Safe Drinking Water Act or applicable state drinking water regulations.

What does this mean for corporate transactions?

No company wants to be surprised to learn that the business it just acquired is on the hook for millions of dollars’ worth of cleanup costs (not to mention the potential for personal injury claims and negative publicity). Companies acquiring other businesses or assets will therefore need to carefully investigate whether the target company may have previously generated, used, sold, or disposed of PFOA or PFOS, and ensure that it is doing all that it can to preserve CERCLA’s limited liability defenses. While a Phase I on the target company’s properties is a part of that review, it is by no means the end of it. Buyers should carefully assess the target company’s historic manufacturing processes (at currently and formerly owned or leased facilities), as well as its waste disposal practices and personal injury claims, to assess whether Superfund liability for PFOA/PFOS (or other PFAS compounds that may be regulated in the future) is a material risk. If it is, careful consideration will need to be made as to how to allocate responsibility for that risk, understanding that representations and warranties insurance policies that are commonly used today are unlikely to cover PFAS-related claims. There is no “rule of thumb” for how to deal with PFAS liabilities in a transaction, and every deal is different. Lawyers will need to be able to come up with creative solutions to this issue to get certain deals across the finish line.

What does this mean for new or existing Superfund sites?

Once the final rule is in effect, EPA will add PFOA and PFOS to its list of hazardous substances it uses for screening when determining whether to add a site to the Superfund Active site inventory for further assessment. If EPA deems that the site should be added to the Superfund Active site inventory, it will evaluate potential PFOA and PFOS contamination as part of its Preliminary Assessment, which is used to determine whether the site is listed on the National Priorities List, allowing EPA to identify PRPs who may have caused or contributed to PFOA and PFOS contamination at the site.

As for existing Superfund sites, PRPs can expect that EPA will begin requesting evaluations of PFOA and PFOS if EPA suspects either or both chemicals were released at the already-designated Superfund site. EPA could foreseeably request such sampling even at “closed” Superfund sites that remain subject to five-year reviews of the remedies implemented at those sites. EPA may request that the PRPs at existing sites conduct testing for PFOA and PFOS voluntarily, or EPA may complete a Preliminary Assessment itself and issue an order requiring the PRPs to undertake further investigation (and possibly remediation) for the chemicals. Note, however, that to the extent the PRPs are not the current owners or operators of the facility, EPA authority under CERCLA only reaches to any party who disposed of or arranged for the disposal of PFOA and PFOS at such locations. Many PRP groups were formed (and allocation for costs assigned) without determining whether such parties disposed of or arranged for the disposal of PFOA and PFOS at such locations and as such those parties should consider carefully their next steps. If PFOA or PFOS is found, the remediation of those compounds could significantly add to the time and cost necessary to complete the remediation and ultimate de-listing of the site. It will also lead PRPs to look for other responsible parties to pay for some of the cleanup costs, leading to new and expensive multi-party litigation.

Reed Smith’s environmental attorneys have been monitoring PFAS developments at the state and federal level for many years. We have experience advising corporate, real estate, and manufacturing clients on how to manage risks associated with these compounds in both litigation and transactional contexts. Please reach out to any of the attorneys identified below if you would like more information.