Early in March 2022, the EPA and the Department of Justice (DOJ) announced the return of the use of Supplemental Environmental Projects (SEP) as part of the available resources that can be utilized in enforcement actions.
“An SEP is an enforcement tool that EPA used for more than 30 years until the previous administration brought it to a halt,” an EPA press release says. “SEPs are local projects that defendants can agree to undertake as part of an enforcement case settlement to help rectify environmental violations. SEPs help to fulfill the goals of the underlying statutes being enforced and can provide important environmental and public health benefits to communities that have been harmed by environmental violations.”
“EPA and DOJ’s partnership to protect overburdened and underserved communities across America has never been stronger,” says EPA Administrator Michael S. Regan. “This environmental justice enforcement strategy epitomizes the Biden-Harris Administration’s commitment to holding polluters accountable as a means to deliver on our environmental justice priorities. Critical to that is the return of [SEPs] as a tool to secure tangible public health benefits for communities harmed by environmental violations.”
Background
The Trump administration banned most uses of this enforcement tool in 2017 when Jeff Sessions, then attorney general, issued a memorandum prohibiting payments to third-party organizations as a condition of a settlement agreement.
“Corporate defendants liked SEPs, which look better and certainly feel better than a payment to the U.S. Treasury. Municipal agency defendants also favor SEPs, given that their violations often occurred because they were cash-strapped and the project might provide some otherwise unavailable public benefit (such as training for inspectors), as opposed to a large cash penalty that simply diverts funds from operations to the federal government,” according to a Lexology article by Davis Wright Tremaine LLP analyzing the decision to return to the use of SEPs. “Those benefits aside, the Trump Administration felt the SEPs could be used to avoid legislative approval for expenditure of federal funds and provide public relations benefits to groups they considered hostile to their goals. The policy was then placed in the regulations governing DOJ policies, at 28 CFR 50.28.”
SEP facts
According to the EPA, the following information is important when considering an SEP as part of a settlement negotiation in enforcement cases:
- Projects submitted as SEPs by a defendant for consideration must have a strong “nexus,” or connection, to the violations being resolved and advance the goals of the statute from which the violations stemmed.
- Generally, the project must involve the same pollutant or health effects as were involved in the violations being resolved, addressing the same adverse impacts or risks to which the violations contributed or preventing future similar violations.
- Each SEP proposed in a settlement must be evaluated in the context of the facts of that specific case, and project ideas cannot be completely analyzed without that context.
- There is no SEP program: The EPA does not develop, fund, or implement SEPs, and they are not a “funding mechanism” for projects. The SEP policy is an enforcement settlement policy only.
- Defendants/respondents may use contractors or other third parties to help implement the projects. However, an SEP is a project a defendant/respondent has committed to perform and cannot simply be cash payments or donations (absent explicit statutory authorization).
- SEPs are voluntary, and the EPA may not demand or require that a defendant perform an SEP.
- SEPs are developed and implemented by a defendant/respondent and are included in a settlement only if a defendant/respondent is interested and proposes a project that meets the legal and other requirements of the SEP policy.
- The EPA maintains the right to reject an SEP, but the Agency does not impose its preference for particular projects on defendants/respondents.
- SEPs may not be directed, controlled, or managed by the EPA.
- SEPs cannot “augment” any existing federal funding or appropriations by providing additional resources to perform the same activity or supplementing the resources Congress has provided to perform federal functions. SEPs cannot be undertaken using federal loans, federal grants, or any other form of federally provided financial assistance.
- SEPs are not a diversion of penalty funds. Under the EPA’s penalty policies, factors such as self-disclosure, cooperation, or good-faith efforts to comply may result in a downward adjustment of an initial penalty calculation. The SEP policy provides for such consideration of a defendant’s/respondent’s willingness to implement an SEP.
- Settlements with SEPs always include a final settlement penalty that retains the deterrent value of the settlement. The penalty includes a component that addresses the gravity of the violation and a component that recoups the economic benefit that the violator realized from its noncompliance to maintain a level playing field with competitors that remained in compliance.
To use an SEP as part of a violation settlement, industry should enter these negotiations with an SEP proposal in mind. “EPA encourages defendants to reach out to the affected communities about project ideas, and, if the Agency is aware of projects with community support, provides such information to defendants, for their consideration,” states the SEP website.
The old SEP policy has faced much opposition and litigation challenges. In the past, “many private sector defendants found the SEP process to be too bureaucratic, too lengthy and uncertain, and too costly, with many electing to just pay the civil penalty,” according to a JD Supra article by Kilpatrick Townsend and Stockton, LLP.
As a result, the former policy has been revoked by the DOJ, and the Agency has issued interim guidance while a new regulation is prepared.
It’s important to note that all proposed SEPs will not be approved.
“A project cannot be something that would otherwise be required or which a federal agency would carry out as part of its normal functions,” Davis Wright Tremaine says. “It has to be a specific project with a specific connection to the alleged violations (air-related SEPs for air quality violations, for example) and cannot designate a specific third party as a recipient.”