Type: Law Bulletins
Date: 07/06/2017

Department of Justice Ends Controversial Third-Party Settlement Practice – What Will It Mean for Supplemental Environmental Projects?

On June 7, U.S. Attorney General Jeff Sessions issued a memorandum prohibiting the Department of Justice (“DOJ”) and the 94 U.S. attorney’s offices from entering into settlement agreements that provide for payment to a nongovernmental, third party that was not directly harmed by the conduct at issue. Settlement payments to third-party, non-governmental organizations (“NGO”) became commonplace during the Obama administration, with millions of dollars in settlement payments going to NGOs.  

Third-party payments were used in a number of the Obama administration’s most high-profile settlements, including, the BP plea agreement regarding Deep Water Horizon ($350 million to the National Academy of Sciences), the mortgage lending settlements with JP Morgan, Citi and Bank of America (millions of dollars to NeighborWorks America and others), and the settlement with Volkswagen regarding vehicle emission testing ($2 billion in settlement payments for investment in zero-emission vehicle infrastructure, such as electric charging stations, to benefit both the public and various NGOs). 

These payments provoked the ire of Congressional Republicans, who introduced the “Stop Settlement Slush Funds Act of 2016” aimed at limiting third-party payments to NGOs in settlement agreements to which the United States is a party. According to a report presented to the House Judiciary Committee, the bill’s sponsors argued that DOJ’s practice of requiring third-party payments circumvented Congress’s appropriation power.     

Pursuant to the Sessions memorandum, the DOJ is prohibited from directing or providing any settlement payments to third-party NGOs that were not named parties to the lawsuit or victims of the defendant’s actions. The policy “applies to all civil and criminal cases litigated under the direction of the attorney general and includes civil settlement agreements, cy pres agreements or provisions, plea agreements, non-prosecution agreements, and deferred prosecution agreements.”

The Sessions memorandum outlined three limited exceptions to the policy: 

  1. [T]he policy does not apply to an otherwise lawful payment or loan that provides restitution to a victim or that otherwise directly remedies the harm that is sought to be redressed, including, for example, harm to the environment or from official corruption;
  2. The policy does not apply to payments for legal or other professional services rendered in connection with the case; and
  3. The policy does not apply to payments expressly authorized by statute, including restitution and forfeiture. 

While the Sessions memorandum will affect settlement agreements across the board, its effect on settlements for environmental cases could be particularly pronounced. Supplemental Environmental Projects (“SEP”), which are environmentally beneficial projects that are not legally required and that an alleged violator may voluntarily agree to undertake in exchange for penalty mitigation, have been a mainstay of environmental settlements for decades—long before the Obama administration. In fact, the first SEP policy was adopted by U.S. EPA in 1991 during the first Bush administration, and the SEP policy was updated most recently on March 10, 2015. SEPs are generally popular with settling defendants, perhaps because they benefit the defendants’ local community rather than the U.S. Treasury.

While it does not appear that SEPs were the target of the Sessions memorandum (and the term “SEP” is not mentioned), it is unclear whether the DOJ will continue to allow SEPs under the new policy. While the memorandum contains an exception for “restitution” that “directly remedies” “harm to the environment,” the scope of this exception is not clear. Further, it appears the prohibition on third-party settlement payments only extends to those cases referred to the DOJ. As such, and for the time being, administrative settlements entered into directly with the EPA should not be impacted.

While it remains to be seen how the Sessions memorandum will be applied to SEPs, the Trump administration has clearly signaled its intention to stop another important settlement practice—the so-called “sue-and-settle agreements” that were alleged to have taken place under the Obama administration.  A staff report from the U.S. Senate Committee on Environment and Public Works, describes sue-and-settle agreements as a practice where “an outside group . . . sues a federal agency, such as EPA, then negotiates a settlement with the administration that appeases the suing party’s policy goals and locks in a timeline for issuing a rule, while often excluding other interested parties and the public and short-circuiting a more deliberate rulemaking process.”   

U.S. EPA Administrator Scott Pruitt has indicated that this practice, to the extent it was a formal practice, will no longer be utilized. In an interview given on March 7, Pruitt stated that, “the days of sue and settle, the days of consent decrees governing this agency where the EPA gets sued by an NGO, a third party, and that third party sets the agenda, sets the timelines on how we do rulemaking, and bypassing rulemaking entirely have ended.”

For more information or questions on the above mentioned policy changes, please contact Will Gardner or Kimberly Lewis.

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