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TABLE OF CONTENTS

Litigation Developments ............................. 1 CERCLA Divisibility Defense CAA Preemption of Tort Litigation Cross-State Air Pollution Rule Mercury and Air Toxics Rule Regulation of Reciprocating Internal Combustion Engines

Rulemaking and Policy Developments ....... 4 Greenhouse Gas Rulemakings Final Ozone NAAQS Startup, Shutdown Malfunction Rules MACT Rule Regional Haze Rulemakings Source Determination Rule for the Oil and Gas Sector Waters of the United States Crude by Rail TSCA Reform Pharmaceutical Waste Underground Storage Tanks

Enforcement Developments...................... 12 DOJ Corporate Investigation Memorandum Next Gen

Biotechnology Developments ................... 14 Vermont Act 120 Safe and Accurate Food Labeling Act of 2015 FDA GMO Determinations

California Regulatory Developments ........ 15 Proposition 65 Climate Change Legislation Hazardous Materials and Waste Water California Environmental Quality Act

European Union Environmental Developments ........................................... 17

MCP Directive Energy Union Strategy EU Eco-Label Tests Challenge Review of Environmental Measures Under Aarhus Convention “Article” Versus “Component” Ruling Endocrine Disrupter Challenge Substance Evaluation Process Under REACH

SIDLEY ENVIRONMENTAL REPORT

2015 Environmental Year in Review

January 28, 2016

Whether the issue is climate change, air quality standards or water jurisdiction, the U.S. Environmental Protection Agency’s (EPA) landmark rulemakings dominated the environmental headlines during 2015. The European Union (EU) also took action on climate change and the energy market, and courts issued key opinions, both in the United States and Europe. This year in review highlights the decisions, rulemakings and policy determinations that likely will have precedential effects and may represent long-term trends affecting the environment and regulated entities during 2016 and beyond. Issues related to shale gas and hydraulic fracturing are covered in Sidley’s Shale and Hydraulic Fracturing blog, available here.

LITIGATION DEVELOPMENTS Comprehensive Environmental Response, Compensation & Liability Act Divisibility Defense. Despite hopes raised in a court of appeals decision in 2014, federal district courts in 2015 remained unwilling to allow companies to limit their Superfund liability through the defense of divisibility. Courts generally hold that Superfund liability is joint and several, although the U.S. Supreme Court has held that defendants can avoid joint and several liability if they can prove that a “reasonable basis for apportionment” exists. Burlington Northern & Santa Fe Ry. v. United States, 556 U.S. 599 (2009). In 2014, the Seventh Circuit reversed a district court decision denying a divisibility defense in the Lower Fox River Superfund case and directed the district court to reconsider whether NCR Corporation had proven its entitlement to divisibility. United States v. P.H. Glatfelter Co., 768 F.3d 662 (7th Cir. 2014). On remand in 2015, the district court initially held that NCR’s liability was divisible and limited to 28 percent of the cleanup cost at the site. United States v. NCR Corp., 107 F. Supp. 3d 950 (E.D. Wis. 2015). Following several motions to reconsider, however, the district court changed its mind and held, instead, that NCR was subject to joint and several liability. United States v. NCR Corp., 2015 WL 6142993 (E.D. Wis. Oct. 19, 2015). (NCR has sought certification for an interlocutory appeal, and that motion is pending.)

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In a separate case, a Rhode Island district court rejected Emhart Industries, Inc.’s attempt to have its liability declared divisible. Emhart Indus., Inc. v. New England Container Co., Inc., 2015 WL 5512202 (D.R.I. Sep. 17, 2015.) Although Emhart offered several different ways the court could apportion the liability — including by geographic area, volume of contamination released, type of contaminants released, and years involved in the site — the court found factual deficiencies in all of them. These cases continue a pattern of district courts’ rejecting efforts to establish a divisibility defense, despite the invitation of courts in cases like Burlington Northern and Glatfelter.

Clean Air Act Preemption of Tort Litigation. Several 2015 cases examined the relationship between common law tort claims and preemption under the Clean Air Act (CAA), adding to a pre-existing split of authority on the question.

The Sixth Circuit rejected defendants’ preemption defenses in companion cases Merrick v. Diageo Americas Supply, Inc., 805 F.3d 685 (6th Cir. 2015) and Little v. Louisville Gas & Electric Company, 805 F.3d 695 (6th Cir. 2015). In Merrick, plaintiffs living near a Louisville whisky distillery alleged that “whisky fungus” coated their homes and property, leaving a soot-like residue, and that ethanol vapors from the distillery caused the fungus to grow. The plaintiffs filed tort claims for damages and an injunction to abate the ethanol emissions by installing control technologies. Defendant Diageo moved to dismiss the plaintiffs’ nuisance and trespass claims, arguing that the CAA imposed comprehensive regulation of all air emissions from the refinery and warehouses. The district court, relying on the CAA’s savings clause, denied the motion to dismiss and certified the ruling for interlocutory appeal. The Sixth Circuit affirmed the lower court’s ruling, citing Bell v. Cheswick Generating Station, 734 F.3d 188 (3d Cir. 2013) as persuasive in finding that the CAA’s savings clause preserves state law tort claims.

The Sixth Circuit applied the same rationale to the companion case, Little v. Louisville Gas & Electric Company, where property owners near the Cane Run coal-fired power plant alleged that dust and coal ash from the plant settled onto their homes and cars. Plaintiffs filed claims of trespass, nuisance and negligence, citing alleged property damage. Unlike the Diageo refinery, the Cane Run plant was subject to an order specifically governing fugitive dust emissions. After issuing six notices of violation, the CAA permitting agency, the Louisville Air Pollution Control District’s Air Pollution Control Board, issued an order for Louisville Gas & Electric to implement a comprehensive odor, fugitive dust and maintenance emissions control plan at the Cane Run plant. The Sixth Circuit never mentioned this distinction. Instead, it merely stated that the question was “disposed of” by the Diageo Americas decision.

The Diageo Americas and Louisville Gas & Electric decisions join the Second and Third Circuit Courts of Appeal in rejecting the CAA preemption defense (In re: MTBE Products Liability Litigation and Bell) along with a 2013 case in the U.S. District Court for the Western District of Texas (Cerny v. Marathon Oil Corporation, No. 13-562, 2013 WL 5560483 (W.D. Tex. Oct. 7, 2013)) and a New Hampshire Supreme Court case (New Hampshire v. ExxonMobil, 126 A.3d 266 (N.H. 2015)). In contrast, two district court cases, Comer v. Murphy Oil USA, 839 F. Supp. 2d 849 (S.D. Miss. 2012) in the Southern District of Mississippi, and United States v. EME Homer City Generation, LP 823 F. Supp. 2d 274 (W.D. Penn. 2011) in the Western District of Pennsylvania, previously dismissed tort claims under the CAA preemption defense.

Two additional courts decided notable CAA preemption cases last year. The Seventh Court of Appeals for Texas in Sciscoe v. Enbridge Gathering (N. Tex.) LP, No. 07-13-00391-CV, 2015 WL 3463490 (Tex. App. June 1, 2015) reinstated nuisance claims by 18 homeowners against several midstream companies alleging that a compressor station was the source of excessive noise, offensive odors and particulate matter emissions that settled on their property. The trial court granted summary judgment for the defendants, holding in part that the nuisance claim was preempted by local, state and federal air regulations. The Seventh Court of Appeals reversed this finding,

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holding that compliance with a permit and regulations does not constitute a license to pollute and that the plaintiffs’ nuisance claim could succeed without interfering with state or federal authority to regulate airborne emissions. The court did uphold the lower court’s grant of summary judgment to defendants on the plaintiffs’ demand of $1,000 for each day the defendants continued their alleged trespass. It found that a $1,000 per day assessment was akin to an extraregulatory fine instead of compensation. It preempted such a claim, finding that, if it were permitted, such an assessment would displace existing mechanisms to fine companies for air quality violations.

In the second case, the U.S. District Court for the Northern District of Alabama in Morrison v. Drummond Co., Inc., No. 14-cv-0406, 2015 WL 1345721 (N.D. Ala. Mar. 23, 2015) found that the CAA’s savings clause preserved a man’s claim that he developed acute myelogenous leukemia from exposure to benzene while working at the defendant’s coke plant, and required a remand to state court. The defendant argued that the plaintiff’s claim would be determined by whether emissions from its coke plant complied with the CAA. The court, however, held that preemption is a narrow grant of federal jurisdiction that was unavailable in light of the CAA’s savings clause.

Cross-State Air Pollution Rule. As reported in Sidley’s 2014 Environmental Year in Review, the U.S. Supreme Court reversed a prior D.C. Circuit decision vacating the EPA’s Cross-State Air Pollution Rule (Transport Rule) in EPA v. EME Homer City Generation, L.P., 134 S. Ct. 1584 (2014) on April 29, 2014. The Transport Rule is EPA’s latest effort to implement the CAA’s Good Neighbor Provision, which instructs states to prohibit upwind sources from emitting air pollutants that “contribute significantly” to downwind states’ ability to attain national ambient air quality standards (NAAQS). In the Transport Rule, EPA determined that states were subject to the rule if their emissions contributed more than one percent of the total emissions in a downwind nonattainment area and then required states to impose cost-based emissions reductions, regardless of the degree to which the state contributed to downwind nonattainment. At the same time, EPA established a federal implementation plan (FIP) for all states covered by the Transport Rule without first giving them an opportunity to implement the Transport Rule through state implementation plans (SIP).

After the Supreme Court’s decision, the case was remanded to the D.C. Circuit for further briefing. On July 28, 2015, the D.C. Circuit issued a decision that granted in part and denied in part the petitions for review of the Transport Rule. The Court granted several “as applied” changes to the EPA-assigned emissions budgets for several states. However, the Court denied the broader challenges to the Transport Rule that were not addressed in the initial decisions in the D.C. Circuit and Supreme Court.

While the Transport Rule was stayed during the initial litigation, the stay was lifted after the Supreme Court’s decision. As a result, implementation of the Transport Rule began on January 1, 2015. In addition, on December 3, 2015, EPA published a proposed update to the Transport Rule. The proposal identifies 23 states that would be in an updated cross-state air pollution region and therefore subject to the new rule. Using a similar approach as in the original Transport Rule, EPA proposes new emissions budgets for each of the 23 states that would take effect beginning in 2017. EPA is accepting comments on the proposed rule until February 1, 2016.

Mercury and Air Toxics Rule. The U.S. Supreme Court reversed a D.C. Circuit decision upholding EPA’s Mercury and Air Toxics Rule on June 29, 2015. (Michigan v. EPA, 576 U.S. __ (2015)). The Mercury and Air Toxics Rule established stringent emissions standards for mercury and other hazardous air pollutants emitted by power plants. The Court held that EPA impermissibly excluded consideration of costs when evaluating whether the regulation of hazardous air pollutants “is appropriate and necessary” under Section 112 of the CAA. Congress enacted a separate regulatory provision for power plants under Section 112 that requires EPA to make such a finding.

While the regulatory scheme for power plants under Section 112 is unique, the Court’s openness to considering costs in this context could have precedent in other areas under the CAA. The immediate effect of the Court’s

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decision, however, may be minimal. First, because the Mercury and Air Toxics Rule was not stayed during litigation, the vast majority of power plants had already taken action to comply with it before the Supreme Court’s decision was issued. Many coal-fired power plants installed costly emission control devices, while others made irreversible decisions to retire. Further, the D.C. Circuit remanded the Mercury and Air Toxics Rule to EPA without vacatur to allow the agency to consider costs. As a result, the rule will remain in effect while EPA completes its review.

Regulation of Reciprocating Internal Combustion Engines. On May 1, 2015, the D.C. Circuit held that EPA’s final rule regulating reciprocating internal combustion engines (RICE) under Sections 111 and 112 of the CAA was arbitrary and capricious. Delaware Department of Natural Resources v. EPA, 785 F.3d 1 (D.C. Cir. 2015) The court challenges centered on an exemption for RICE generators operating fewer than 100 hours per year that petitioners asserted could be used as backup generators to replace clean energy sources. The court held that EPA failed to respond to petitioners’ comments on that issue as required by the CAA and the Administrative Procedure Act. Key themes throughout the litigation were EPA’s authority to address electricity grid reliability under the CAA and the way in which EPA should interact with the Federal Energy Regulatory Commission when environmental regulations may affect the electricity grid. The court subsequently granted EPA’s request to delay issuance of the mandate in the case until May 1, 2016, so that EPA could evaluate how to implement the remainder of the RICE rule after vacatur of the 100-hour-operation exemption.

RULEMAKING AND POLICY DEVELOPMENTS Greenhouse Gas Rulemakings. 2015 marked a significant expansion of EPA’s regulation of greenhouse gas (GHG) emissions under the CAA in a variety of sectors.

Endangerment Determination for GHG Emissions from Aircraft. On July 1, 2015, EPA proposed a new endangerment determination under the CAA for GHG emissions from aircraft. As with motor vehicles, the CAA requires EPA to make a determination that emissions from aircraft cause or contribute to the endangerment of public health and welfare before it can regulate such emissions. EPA’s proposed endangerment determination was similar to its finding for motor vehicles and relied on much of the same scientific evidence. EPA also noted that U.S. aircraft emit 11 percent of total GHG emissions from the transportation sector and three percent of total U.S. GHG emissions.

At the same time, EPA issued an advanced notice of proposed rulemaking (ANPR) for GHG emissions from aircraft. EPA and other federal actors have been engaged in international negotiations regarding GHG emissions from aircraft, and, in the ANPR, EPA solicited comment on several proposals that have arisen from those international discussions. EPA is expected to finalize the endangerment determination and issue proposed regulations for GHG emissions from aircraft during 2016 after the international community has had an opportunity to develop an international standard for such emissions.

GHG Emissions from Heavy-Duty Vehicles. On July 13, 2015, EPA and the National Highway Traffic and Safety Administration (NHTSA) issued proposed GHG emission limits and fuel efficiency standards for heavy-duty vehicles for model years 2018 through 2027. This is the fourth joint rulemaking on GHG emissions and fuel efficiency standards issued by EPA and NHTSA, including two prior rulemakings for light-duty passenger vehicles and one prior rulemaking for heavy-duty vehicles. These Phase 2 regulations for heavy-duty vehicles pick up where the first heavy-duty vehicle rule left off and continue EPA and NHTSA’s attempt to aggressively reduce GHG emissions from mobile sources. The agencies project that the rule, if finalized, could reduce fuel consumption (and GHG emissions) from tractor trailers by 24 percent. Overall, the agencies project that the rule could reduce GHG emissions by one billion metric tons while conserving 1.8 billion barrels of oil over the lifetime of the vehicles sold under the program.

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The comment period for this proposal has closed. EPA is expected to issue a final rule this year.

GHG Emissions from the Power Sector. EPA finalized two significant rulemakings under Section 111 of the CAA to regulate GHG emissions from new and existing fossil fuel-fired power plants. These rules are highly controversial and subject to ongoing litigation. Nevertheless, EPA and many states are moving forward with plans to implement these rules in accordance with EPA-imposed deadlines for further action.

• New Source Performance Standards (NSPS) for New Fossil Fuel-Fired Power Plants. On October 23, 2015, EPA finalized a rulemaking under Section 111(b) of the CAA that established NSPS for new, modified and reconstructed fossil fuel-fired power plants. The final rule imposes an emission limit of 1,400 lb CO2/MWh for new coal-fired power plants that is based on partial carbon capture and sequestration (CCS). This is substantially less than the emissions from any currently operating commercial coal-fired power plant. Modified and reconstructed coal-fired power plants are subject to less stringent requirements that, for modified sources, are based on each source’s historical emissions. Combined cycle natural gas turbines are subject to emissions limits that are consistent with current emissions, meaning that the rule is not likely to result in any additional emission reductions from natural gas-fired power plants.

EPA’s NSPS for fossil fuel-fired power plants has been challenged by multiple parties in the D.C. Circuit. Litigation is expected to focus on EPA’s authority to regulate fossil fuel-fired electric generating units under Section 111(b) of the CAA and on EPA’s reliance on CCS technology to set emissions limits for new coal-fired power plants.

• Clean Power Plan for Existing Fossil Fuel-Fired Power Plants. EPA also finalized the Clean Power Plan in October 2015, establishing binding emissions guidelines for CO2 emissions for existing fossil fuel-fired power plants. Overall, the rule is projected to reduce GHG emissions from existing fossil fuel-fired power plants by 32 percent compared with 2005 levels. EPA made a number of changes from the proposal but still requires emissions reductions far beyond what can be achieved at the source by existing fossil fuel-fired power plants. While EPA altered its approach to calculating the emissions reductions that could be achieved by the “best system of emission reductions,” the agency continues to rely heavily on the increased use of renewable energy and on redispatching electricity generation from coal-fired power plants to natural gas-fired power plants. Overall, however, EPA projects that demand for natural gas will decline slightly as a result of the rule. Demand for coal will fall dramatically according to EPA’s projections. EPA also provided a slight adjustment to the compliance deadlines, imposing interim compliance requirements from 2022–29, with final standards coming into effect in 2030. The Clean Power Plan establishes state-specific emission reduction targets based on historical generation that can be met through a rate-based or mass-based plan. The Clean Power Plan also authorizes states to develop both intrastate and interstate trading programs to comply with the emission reduction targets. While EPA touts the flexibility provided by the final rule, states seeking to implement these standards will have no choice but to dramatically reduce coal-fired electricity generation while rapidly expanding renewable energy and energy-efficiency programs.

The Clean Power Plan was challenged in the D.C. Circuit within hours of its publication in the Federal Register. In total, 41 petitions for review were filed. While petitioners are expected to raise a host of issues, EPA’s authority to look beyond fossil fuel-fired power plants and require other changes to the methods of production will likely be at the center of this litigation. Given the significance of this rulemaking and the fact that initial compliance deadlines are approaching, several petitioners are seeking a stay of the Clean Power Plan until litigation is complete. The stay motions have been fully briefed, but at press time the court has not issued a decision.

• Implementation of Clean Power Plan. Under Section 111(d) of the CAA, states have primary authority for implementing the Clean Power Plan and must submit implementation plans to EPA for approval. If a state does not submit a satisfactory plan, EPA must prepare a federal implementation plan. The Clean Power Plan established a September 6, 2016, deadline for states to submit implementation plans. However, states may seek a two-year extension after meeting minimum progress goals. Many states are already beginning public outreach as they determine how to implement the aggressive emission reduction goals in the Clean Power Plan.

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In addition, on October 23, 2015, EPA issued a proposed FIP as well as model trading rules for the states. The proposed FIP includes both a mass-based and a rate-based approach to complying with the Clean Power Plan as well as additional details regarding plan implementation that were not included in the final Clean Power Plan. EPA suggests that the proposed FIP may serve as a model to states as they prepare their own implementation plans and says that provisions in the proposed FIP will be presumptively approvable if included in state implementation plans. The comment period for the proposed FIP closed on January 21.

Regulation of Methane Emissions from the Oil and Gas Sector. On September 18, 2015, EPA proposed NSPS to control methane and volatile organic compound (VOC) emissions from new and modified sources in the oil and gas sector. The proposal, issued under Section 111(b) of the CAA, expands on EPA’s prior regulation of this source category by adding methane controls for the first time and by adding new sources that were not previously regulated. While the methods for controlling methane are similar to those already in place to control VOCs, the inclusion of new sources marks a significant expansion of the oil and gas NSPS. In particular, EPA proposes to expand the current NSPS for the oil and gas sector to include hydraulically fractured wells and downstream gas processing sources. In addition, EPA is proposing a new fugitive emissions monitoring program designed to identify and repair methane and VOC leaks.

If finalized, these regulations would have a significant effect on oil and gas development and on EPA’s regulation of GHG emissions as a whole. First, this proposal marks the first time EPA has sought to regulate methane as a GHG and the first time it has sought to regulate GHG emissions specifically from the oil and gas sector. As such, it represents a significant expansion of EPA’s climate change agenda. While EPA has previously imposed similar requirements on a smaller subset of sources through VOC emissions limits in prior rulemakings, the scale of these regulations is significantly larger and presents implementation challenges.

The comment period for this proposal has closed. EPA is expected to issue a final rule this year.

Final Ozone NAAQS. On October 26, 2015, EPA published in the Federal Register its final NAAQS for ozone. It reduced both the primary (health-based) standard and the secondary (welfare-based) standard from 75 to 70 parts per billion (ppb). In doing so, EPA rejected the position advanced by industry and some states that the existing standard should be retained, as well as the position advanced by some non-governmental organizations (NGOs) that the primary standard should be reduced to 65 ppb or less and that a separate secondary standard should be set using a different, seasonal form (which would be more stringent that the standard set by EPA). This is just the fourth time the ozone NAAQS have been changed since the original standard was issued in 1971.

Some industry organizations argue that the final ozone NAAQS will have a significant adverse effect on businesses throughout the country and the overall U.S. economy. The new NAAQS will require states to develop new or revised SIPs with additional regulatory control requirements on sources of the chemicals that form ozone in the atmosphere (primarily nitrogen oxides and VOCs) in an effort to reduce those emissions and attain the revised NAAQS. This could mean extensive and costly emissions reductions or other control actions by sources of these chemicals. In some areas of the country, the reduced ozone NAAQS will be difficult, if not impossible, to attain due to background ozone concentrations (i.e., those that are not attributable to anthropogenic U.S. sources). Further, the revised NAAQS will require the designation of new or expanded geographical areas as “nonattainment” areas for the revised ozone NAAQS. This designation carries stringent regulatory requirements, including those applicable to review of potential new and modified sources within such areas. On the other hand, EPA argues that the new standard is based on the best available science and that a number of new and proposed federal rules, such as the Regional Haze, Mercury and Air Toxics, Clean Power Plan and new vehicle standards, will help states meet the new standard.

Several states and industry organizations have filed appeals with the D.C. Circuit challenging the revised NAAQS as overly stringent. In addition, the NGOs have filed an appeal in the same court arguing that EPA should have

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reduced the standard even further — to 60 ppb. If adopted, the lower standard could have additional adverse effects on all sectors. For example, an economic analysis sponsored by the National Association of Manufacturers estimated that a standard of 60 ppb, if attainable, could, from 2017 through 2040, cost over $6 trillion and result in a loss of approximately 2.9 million job equivalents. The appeals have been consolidated and will be briefed later in 2016.

Startup, Shutdown Malfunction (SSM) Rules. As reported in Sidley’s 2014 Environmental Year in Review, EPA issued a proposed rule and a supplemental proposed rule addressing the treatment of air emissions during SSMs in 2013 and 2014. These proposals were issued in response to a petition for rulemaking filed by the Sierra Club in 2011 that argued that SSM provisions contained within many SIPs violate provisions of the CAA, which require emission sources to continuously meet emissions limitations. EPA’s 2013 and 2014 proposals significantly altered the way in which states traditionally had addressed SSM events.

The final rule was published on June 12, 2015 (80 Fed. Reg. 33840). This action invalidated “affirmative defense” provisions shielding industrial facilities from civil penalties for exceedances of emissions limits that occur during SSM events. The final rule also determined that states could not automatically exempt facilities from emission limits during SSM and identified the SSM provisions in the SIPs of a total of 36 states (each listed here) as failing to meet CAA requirements. In other words, the rule requires states to revise their SIPs so that all excess emissions caused by SSM events would be identified as violations. The final action requires that those states subject to the SIP Call submit their revised SIPs by November 22, 2016. The final rule also contains criteria for developing and evaluating alternative emission limitations applicable during startup and shutdown.

On August 11, 2015, 17 states challenged EPA’s June 2015 final rule. The states’ petition for review of the rule, filed with the D.C. Circuit Court, was very brief, arguing simply that the “EPA erroneously concluded that the [SIPs of those 17 challenging states] are ‘substantially inadequate’ with regard to periods of startup, shutdown and malfunction and must be revised.”

Several other petitions challenging the rule were also filed by energy companies and other interested legal groups.

Refinery Technology and Residual Risk Maximum Achievable Control Technology (MACT) Rule. CAA Section 112 requires EPA to periodically review final emission standards addressing hazardous air pollutants (commonly called MACT standards or national emission standards for hazardous air pollutants) to evaluate both technological developments and risks to public health that remain after application of the standards. Based on its reviews, EPA is further required to revise the standards as necessary to “tak[e] into account developments in practices, processes, and control technologies” and/or to provide an “ample margin of safety to protect public health … or to prevent, taking into consideration costs, energy, safety and other relevant factors, an adverse environmental effect.” CAA §112(f)(2).

On December 1, 2015, EPA’s final refinery sector technology and residual risk review rulemaking (Refinery Rule) was published in the Federal Register. 80 Fed. Reg. 75,177. While it is not the first final rule to stem from EPA’s technology and residual risk assessments, it is notable for several reasons. Most significantly, based on EPA’s technology review, the Refinery Rule for the first time requires facilities to conduct fenceline pollutant monitoring. Specifically, subject facilities are required to install benzene monitors around their property boundaries to continuously monitor ambient benzene concentrations. If concentrations exceed an established action level, facilities will be required to conduct root cause analyses and implement corrective actions. Monitoring data will be made available to the public through an EPA database. EPA anticipates that the monitoring systems will “improve the management of fugitive emissions” from a broad range of activities and equipment, including wastewater collection, equipment leaks, heat exchange systems and storage vessels. EPA additionally anticipates that it will increase facility accountability by creating a “kind of neighborhood watch.” By making data easily accessible to the

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public, the Refinery Rule may encourage added scrutiny from neighbors, environmental watchdog groups and plaintiffs’ attorneys. Although the Refinery Rule is the only rule to require fenceline monitoring and sharing of data so far, similar programs will likely appear in rulemakings as such programs are consistent with EPA’s Next Generation Compliance Initiative (Next Gen), discussed below. Moreover, because EPA justified the monitoring program on the basis of general technological developments — a justification that arguably crosses all industries — such programs can more easily be extended because a showing of residual risk will not be required.

With respect to the remainder of the rule, although EPA determined that the level of risk remaining after application of the MACT standards was “acceptable,” it nevertheless concluded that additional regulation is appropriate to ensure the ample margin of safety. On that basis, the Refinery Rule expands certain storage vessel control requirements and extends the requirements to a larger group of vessels.

Regional Haze Rulemakings. The CAA directs states to develop implementation plans to reduce levels of regional haze and improve visibility in national parks, wilderness areas and other, related areas. Efforts to address regional haze have focused on large industrial sources, most notably power plants. EPA has recently taken a more aggressive approach to the regional haze program that has resulted in several proposals to reject SIPs as insufficient and to replace them with more stringent FIPs.

Texas and Oklahoma. On December 16, 2014, EPA issued a proposed rule disapproving part of the regional haze SIPs submitted by Texas and Oklahoma and proposing FIPs to take their place. EPA asserted in the proposal that the Texas SIP would not produce sufficient improvement in visibility in protected areas in Texas and Oklahoma. Specifically, EPA asserted that the state’s reasonable progress goals failed to comply with the statutory requirements of the CAA. EPA then conducted an analysis of power plants in Texas and, in its proposed FIP, included emissions reductions in the power sector that went beyond what Texas had proposed. EPA received a number of comments on the proposed rule that criticized EPA’s approach and questioned the legality of both EPA’s proposed disapproval of the Texas and Oklahoma SIPs and the process EPA used to set reasonable progress goals in Texas. On January 5, 2016, EPA published a final rule that was little changed from the proposal. Litigation over EPA’s disapproval of the Texas and Oklahoma SIPs and issuance of FIPs in their places is expected.

Arkansas. On May 1, 2015, EPA issued a proposed regional haze FIP for Arkansas. EPA had disapproved of Arkansas’ regional haze SIP in a different rulemaking. In the proposed FIP, EPA identified specific emission reduction targets for a number of power plants as a means to improve visibility in protected areas in and around Arkansas. As in the Texas and Oklahoma proposal, the rulemaking faces challenges regarding EPA’s statutory authority to impose limits on certain plants as well as the process and modeling EPA used in the FIP. The comment period on this proposal has closed, but EPA has not yet issued a final rule.

Source Determination Rule for the Oil and Gas Sector. On September 18, 2015, EPA proposed a new “source determination” rule for stationary sources in the oil and gas sector. The rule’s purpose is to clarify when individual emission points can be aggregated for purposes of meeting regulatory thresholds for major sources under the CAA. EPA proposed two options for defining the term “adjacent” for purposes of making aggregation decisions. The first proposal would define adjacency in terms of proximity, proposing a distance of a quarter mile for use in making aggregation decisions. The second proposal would define adjacency in terms of functional relatedness, allowing for aggregation of sources that are located near each other or related by function. EPA has expressed a preference for a proximity-based test but solicited comment on both alternatives.

This rulemaking is EPA’s attempt to end a long-running dispute over how to aggregate sources in the oil and gas sector. In Summit Petroleum Corp. v. EPA, 690 F.3d 733 (6th Cir. 2012), the Sixth Circuit vacated EPA’s attempt to aggregate sources over a broad area encompassing more than 40 square miles. The court held that EPA’s expansive aggregation of sources was inconsistent with the CAA. EPA’s later attempt to limit the scope of that

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decision to states in the Sixth Circuit was also struck down by the D.C. Circuit, which held that EPA regulations required a uniform approach to adjacency across the entire country. Nat’l Envtl. Dev.Ass’n v. EPA, 752 F.3d 999 (D.C. Cir. 2014). This rulemaking is an attempt by EPA to provide a uniform approach to defining adjacency for purposes of aggregating sources that is consistent with the CAA.

The comment period for this proposal has closed. EPA is expected to issue a final rule this year.

Waters of the United States. On June 29, 2015, the U.S. Army Corps of Engineers (Corps) and EPA published a final rule defining the scope of waters protected under the Clean Water Act (CWA) in an effort to provide clarity to the term “waters of the United States” following decisions by the Supreme Court in Solid Waste Agency of Northern Cook County v. U.S. Army Corps of Engineers, 531 U.S. 159 (2001), and Rapanos v. United States, 547 U.S. 715 (2006). Scheduled to go into effect on August 28, 2015, the rule was challenged in federal court in North Dakota by a coalition of 13 states, which claimed that the new rule brought sweeping changes to the jurisdictional reach of the CWA, drastically expanding the scope of the water-quality programs administered and implemented by states, EPA and the Corps. The new rule also provoked controversy with regard to how it should be challenged. The North Dakota district court rejected the federal government’s claim that review was available only by petition for review in an appellate court. The District Court ruled that it had jurisdiction and issued a preliminary injunction on August 27, 2015, applicable in the 13 plaintiff states. However, petitions for review were also filed in courts of appeals; four such actions brought by 18 other states were consolidated by the Panel on Multi-District Litigation for handling by the Sixth Circuit, bringing the total number of states challenging the rule to 32. In addition, numerous parties, trade organizations, NGOs and others have intervened, some in support and others in opposition. On October 9, 2015, the appellate court also found that it had jurisdiction, at least for the purpose of issuing an interim stay order, thereby preventing the rule’s effectiveness on a nationwide basis.

At this point, the Corps, EPA and the states have resumed nationwide use of the agencies’ prior regulations defining the term “waters of the United States.” The Sixth Circuit is expected to decide early this year whether it or federal district courts have jurisdiction under the CWA to adjudicate the many challenges to the new rule. Thereafter, litigation on the merits will resume in whatever court is found to have jurisdiction. Many interested parties expect that the Supreme Court will make the final decision on the rule’s validity.

In the Rapanos case, all nine Supreme Court justices agreed that the term “waters of the United States” includes some waters that are not navigable in a traditional sense, but Rapanos provided no clear judicial holding on the ultimate breadth of the term. The Corps and EPA assert that the final rule provides the clarity needed after Rapanos, without broadening the jurisdictional reach of the program. The rule establishes a “significant nexus” standard, finding jurisdiction under the CWA if the subject waters, either alone or in combination with similarly situated waters in the region, significantly affect the chemical, physical or biological integrity of traditional navigable waters, interstate waters or the territorial seas. Also, the Corps and EPA assert that the new rule’s increased use of “bright-line” boundaries to establish waters that, by rule, are jurisdictional thereby limits the need for case-by-case review. To do this, the new rule defines “waters of the United States” as falling within eight categories of jurisdictional waters, while maintaining all existing exclusions from the reach of the CWA.

Crude by Rail. Following several high-profile incidents involving crude oil trains, the U.S. Department of Transportation’s Pipeline and Hazardous Materials Safety Administration issued its final rule imposing new tank car standards, speed limits and braking standards for high-hazard flammable trains (HHFTs) in May 2015. HHFTs are defined as single trains with a continuous block of 20 or more tank cars loaded with a flammable liquid or with 35 or more loaded tank cars carrying a flammable liquid dispersed throughout the train. The final rule did not deviate substantially from the proposed rules in terms of topics covered but did ultimately extend many of the compliance dates. Key requirements:

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• Certain enhanced braking requirements for HHFTs traveling in excess of 30 miles per hour were required by the July 2015 effective date, but the more controversial, electronically controlled pneumatic braking systems will be required only for HHFTs carrying 70 or more cars and were given a compliance date of January 1, 2023 (or January 1, 2021, if any one car is carrying a more highly flammable category liquid referred to as a Packing Group 1 material).

• There are enhanced standards for tank cars built after October 1, 2015, for use in HHFTs and a compliance schedule for retrofitting existing tank cars that varies according to two risk factors: the packing group categorization of the flammable liquid and the type of tank car. A retrofit reporting requirement — requiring owners or lessees of covered tank cars to report the number of tank cars retrofitted and the number of retrofits yet to be completed — is triggered if the initial retrofit milestone is not met.

• Reduced operating speeds are mandated: a maximum of 50 miles per hour in all areas and for HHFTs with cars not meeting the enhanced standards; 40 miles per hour in all designated high-threat urban areas.

• There are enhanced testing requirements for unrefined petroleum products prior to initial shipping and where changes (mixing, subsequent processing) may affect characteristics, broader certification obligations and written documentation and annual updates of the testing program and protocols in use.

The final rule was almost immediately subject to both legal and administrative challenges from both industry and parties concerned that the final rules were not sufficiently stringent.

Toxic Substances Control Act (TSCA) Reform. After years of legislative wrangling on various proposals to amend the outdated TSCA, the U.S. Senate late on December 17, 2015, passed by voice vote a bipartisan bill that would substantially revise the way chemicals are assessed and regulated by EPA. The House of Representatives had passed its version of TSCA reform (H.R. 2576) in June. The overwhelming bipartisan support for reform of the chemical safety law is reflected in the margin of passage of the House bill, a 398-1 vote, and the fact that the Senate bill passed by voice vote.

The Senate bill, S.697, had been voted out of committee in April; however, in the face of opposition by Senator Boxer of California, a floor vote was not scheduled. Notwithstanding Senator Boxer’s opposition, support for the bill continued to grow as minor tweaks were made, and it eventually garnered 60 co-sponsors. But a vote was delayed further as a result of a hold placed on the bill related to the dispute over the Land and Water Conservation Fund. Once that issue was resolved as part of the compromise appropriations package, the way was cleared for a vote on S.697. Senate leaders then put forward for consideration an amended H.R. 2576, in which all the original House language was replaced with the revised S.697. Therefore what the Senate approved by voice vote on December 17 was an amended H.R. 2576.

Now before the Congress are two very different versions of H.R. 2576, and much work still must be done to reconcile the bills. To begin with, the House bill is much less detailed and prescriptive than the Senate bill. The House bill is 46 pages, while the Senate bill is more than four times as long. In many instances, the approach in the House bill is to grant EPA new authority to act in certain areas, e.g., chemical prioritization and risk assessment, whereas the Senate bill to a much greater extent directs EPA’s future actions.

Examples of areas with significant differences are prioritization of chemicals and supportive funding of EPA’s regulatory activities. The Senate bill establishes a multistage process for EPA to prioritize the chemicals that must be assessed (of over 86,000 “existing chemicals,” it is thought that approximately 1,000 are of sufficient concern to require comprehensive risk assessment). The Senate bill requires EPA to designate high- and low-priority chemicals. EPA is to designate 10 high- and 10 low-priority chemicals within 180 days of enactment; within three years, EPA is to have either completed or have in process 20 high-priority chemical risk assessments; this number increases over time. Under the House bill, EPA authority to require testing is expanded, but a mechanism for EPA priority setting is not specified. Similarly, means for supportive funding for EPA regulatory activities is very

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different in the two bills. In the Senate bill, EPA is to establish “reasonable fees” on manufacturers and processors taking specific actions under TSCA. The House bill, on the other hand, merely provides that EPA may require fees for manufacturers and processors taking certain actions under TSCA. These are but two examples of the differing approaches in the House and Senate bills..

It is anticipated that the two chambers will begin work early this year to reconcile these two bills. Congressional leaders have not announced whether this will occur in the context of a formal conference committee or whether reconciliation will come about via negotiation.

Pharmaceutical Waste. On August 31, 2015, EPA proposed a rule establishing management standards for pharmaceutical wastes that are classified as Resource Conservation and Recovery Act (RCRA) hazardous wastes. The proposal was published in the Federal Register on September 25, 2015.

In 2008, EPA had originally proposed to add pharmaceuticals to the types of hazardous waste that could be classified as “universal wastes.” But after taking public comment, EPA decided to not finalize that proposed rule and instead developed another proposal with new standards for the management and disposal of pharmaceutical hazardous wastes that are generated by healthcare-related facilities.

Specifically, the proposed rule contains new standards for healthcare facilities and pharmaceutical reverse distributors, including standards for storage, labeling, recordkeeping, reporting and shipment. Healthcare facilities include hospitals, health clinics, other medical facilities, pharmacies and retail facilities that sell over-the-counter medication. The proposal conditionally exempts hazardous waste pharmaceuticals that are classified as controlled substances under regulations established by the Drug Enforcement Administration. EPA states that the proposal is projected to prevent the flushing of more than 6,400 tons of hazardous waste pharmaceuticals annually by banning healthcare facilities from flushing such waste down the sink and toilet.

The proposed pharmaceutical waste rule was issued at the same time as a separate proposed rule that would substantially revise the requirements for generators of RCRA hazardous waste. The comment period for both proposed rules closed on December 24, 2015.

Underground Storage Tanks (UST). On July 15, 2015, EPA published in the Federal Register, as a final rule, revisions to the UST regulations, including revisions to the UST technical requirements and to the state program approval requirements. These are the first major revisions to the UST regulations since 1988. The revisions modify the 1988 federal UST regulations by increasing emphasis on properly operating and maintaining UST equipment.

Specifically, the revisions change certain portions of the 1988 UST technical requirements at 40 CFR part 280. The revisions establish federal requirements that are similar to key portions of the Energy Policy Act of 2005. EPA also added new operation and maintenance requirements and addressed UST systems deferred in the 1988 UST regulations. Specific changes include:

• adding secondary containment requirements for new and replaced tanks and piping

• adding operator training requirements

• adding periodic operation and maintenance requirements for UST systems

• adding requirements to ensure UST system compatibility before storing certain biofuel blends

• removing past deferrals for emergency generator tanks, airport hydrant systems and field-constructed tanks

• updating codes of practice

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• making editorial and technical corrections

The revisions also update the state program approval requirements in 40 CFR part 281 consistent with these changes.

ENFORCEMENT DEVELOPMENTS Department of Justice (DOJ) Corporate Investigation Memorandum. Through a September 9, 2015, guidance document — the Yates memo — the DOJ issued new internal guidelines regarding “individual accountability for corporate wrongdoing.” The memo articulates several changes to DOJ policy and has been incorporated into the U.S. Attorneys’ Manual, §9-28.000. Some of its major points largely expand on existing practices regarding the investigation and prosecution of corporate wrongdoing, while other aspects of the memo introduce new challenges for corporate internal investigations — particularly with regard to the ability to protect privileged information while still receiving credit for cooperating with a government investigation. For environmental matters the policy, taken as a whole, would be a fundamentally new approach, especially in civil cases.

The Yates memo sets out six principles to guide DOJ enforcement actions:

1. To be eligible for any cooperation credit, corporations must provide to DOJ all relevant facts about the individuals involved in corporate misconduct.

2. Both criminal and civil corporate investigations should focus on individuals from the inception of the investigation.

3. Criminal and civil attorneys handling corporate investigations should be in routine communication.

4. Absent extraordinary circumstances, no corporate resolution will provide protection from criminal or civil liability for any individuals.

5. Corporate cases should not be resolved without a clear plan to resolve related individual cases before the statute of limitations expires, and declinations as to individuals in such cases must be memorialized.

6. Civil attorneys should consistently focus on individuals as well as the company and evaluate whether to bring suit against an individual based on considerations beyond that individual’s ability to pay.

The principal thrust of the new guidance is a requirement that a self-reporting company seeking cooperation credit make a full disclosure to DOJ, particularly by identifying culpable individuals. In distinguishing between cases in which companies have been punished severely versus leniently, DOJ has already emphasized the significance of a company’s disclosures regarding corporate officers involved in wrongdoing. For example, several companies that have recently been charged and convicted of serious offenses — and have paid steep fines as punishment — were criticized by DOJ for their lack of cooperation. Going forward, DOJ indicated that its disclosure policy will be enforced more stringently. For example, DOJ has analogized a company that fails to identify responsible individuals to a drug trafficker who is unwilling to testify against a cartel boss. These considerations will also apply to charging decisions in civil cases; the scope of cooperation may affect whether DOJ chooses to pursue a parent or its subsidiary.

Some aspects of this requirement likely will pose challenges for companies conducting internal investigations. The 2008 Filip Memo (also known as the Principles of Federal Prosecution of Business Organizations) previously established that a corporation may receive cooperation credit while continuing to withhold privileged materials, including memos of interviews conducted during an investigation, as long as the corporation discloses relevant facts relating to the alleged misconduct. Although the Yates memo carefully limits the required disclosures to non-privileged information, it is unclear how DOJ will address assertions of privilege in the assessment of total cooperation, particularly with regard to withholding interview memos that may reflect the statement of targeted

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individuals. Likewise, if a company is unable to establish individual culpability through an internal investigation, it may have no choice but to waive privilege to demonstrate why not.

An additional challenge will be determining what scale of internal investigation is required to satisfy these requirements. Establishing culpability for any one individual can be extremely difficult, particularly in cases involving failures to implement adequate safeguards, and can require a probing — and potentially expensive — investigation beyond what might be required solely to identify a problem and begin basic remediation within the company. It may be possible to identify individuals whose conduct would warrant termination, but the new guidance suggests that DOJ expects companies to go further, developing evidence of legal culpability sufficient to materially assist with the individuals’ prosecution.

A second major issue raised by the guidance is a policy to resolve individual cases before corporate ones. The Yates memo allows a corporate case to be closed only if prosecutors memorialize a clear plan for the resolution of any accompanying individual cases. This raises the possibility that corporations could spend long periods of time in limbo, cooperating with DOJ and making required public disclosures but nevertheless unable to obtain closure. Similarly, the requirement that prosecutors memorialize the reasons for any declination of prosecution against individuals has the potential to encourage more such prosecutions, imposing ongoing cooperation obligations on companies and extending the time before any issues can be closed.

Finally, DOJ is reducing the weight afforded to an individual’s ability to pay in determining whether to bring civil charges. DOJ indicated that financial resources will be only one consideration in making civil charging decisions, recasting the role of civil litigation to focus on establishing accountability and broader deterrence rather than achieving a monetary recovery.

This new guidance could represent a paradigm shift for public health and welfare areas with parallel tracks of civil and criminal enforcement, such as environmental law. In the criminal context, environmental laws often contain low liability standards, with general intent felonies and even negligence-based misdemeanors under many statutes. This expands the potential universe of individuals in whom DOJ might be interested and thus who must be considered in corporate internal investigations. In the civil context, the Yates memo portends even greater changes. EPA’s primary goals in civil enforcement are a return to compliance, maintenance of compliance and reduction of pollutants. Civil enforcement traditionally focused on the company except in the case of very small businesses with only a few employees. The new focus on individuals, especially considering that the civil liability standard is very low in many environmental laws, could greatly complicate civil enforcement by expanding the number of employees on whom EPA, DOJ or both might choose to focus. This apparent shift raises a variety of issues, from whether employees will require separate counsel to whether joint defense agreements with current and former employees will still be viable. The Yates memo also raises issues concerning EPA’s Audit Policy. Incentives for Self-Policing: Discovery, Disclosure, Correction and Prevention of Violations, 65 Fed. Reg. 19618 (Apr. 11, 2000). EPA’s Audit Policy encourages self-reporting violations by reducing a gravity-based component of any civil penalty for voluntary disclosure. Following the Yates memo, it is not clear if a company’s disclosures under the Audit Policy must also address possible individual malfeasance. Additionally, it is not clear if EPA can promise not to recommend prosecution of the company if individuals have not been sufficiently investigated.

Next Gen. As we reported in Sidley’s 2014 Year in Review, EPA has embarked on a Next Gen. EPA generally describes its on-going initiative as an effort to increase compliance by using “advances in pollutant monitoring and information technology combined with a focus on designing more effective regulations and permits to reduce pollution.” It utilizes a combination of interrelated tools or concepts to fulfill its goals:

• More Effective Regulations and Permits — new and revised permits and regulations that include “built in” compliance mechanisms such as continuous monitors for stationary sources or pre-certified control systems modeled on the automobile gas mileage and diesel engine emission programs.

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• Advanced Monitoring — use of new monitoring techniques such as fenceline monitoring, infrared camera systems or continuous water sampling systems.

• Electronic Reporting — electronic reporting of emissions and compliance data.

• Transparency — public availability of the electronic data and possibly third-party audits or verification of results.

• Innovative Enforcement — incorporation of these concepts in administrative or judicial settlements and injunctive relief demands.

EPA’s efforts to promote Next Gen in 2016 are illustrated through the following examples:

• Rulemakings: EPA’s 2015 Refinery Rule requires facilities to install continuous benzene monitors at their fencelines and report the data quarterly on a publicly accessible website. See Refinery Technical and Residual Risk Rule section, above.

• Settlements: Settlements to resolve claims under a number of regulatory programs have included a broad range of Next Gen components, including: installation of automated electronic release detection monitoring systems with off-site alarms; implementation of centralized monitoring locations; evaluation of vapor control system designs followed by a report to the public to promote sharing of information; use of infrared cameras during inspections to enable real-time detection of air emissions; and use of third-party audits to verify compliance.

Data generated to meet these Next Gen requirements may qualify as “credible evidence” for enforcement purposes. It may also spur or lend support to common law tort actions such as those highlighted in the litigation section above.

One potential benefit of some of the Next Gen activities is increased compliance rates and emissions reductions attributable to real-time data and improved monitoring. These data can provide early indications of potential operational problems. It is generally accepted that publication of compliance data tends to cause higher rates of compliance than a base case in which the data is unreported and unpublished. Whether publication on websites causes higher rates of compliance than systems that require periodic compliance reporting (such as Title V certifications or discharge monitoring reports) to state or federal regulators is less clear.

Whatever the risks or benefits, Next Gen is a clear priority of the Office of Enforcement and Compliance Assurance and the initiative is consistent with EPA’s broader efforts to use electronic reporting and public dissemination of data as a regulatory tool. In this sense, the initiative is an attempt to modernize EPA’s enforcement mechanisms. The extent to which it serves as additional deterrence to violations and contributes in a material way to improved compliance largely depends on EPA’s efforts to implement and support the initiative. Anyone engaged with EPA in enforcement matters or rulemaking development will need to be familiar with these efforts to effectively and productively engage with the agency.

BIOTECHNOLOGY DEVELOPMENTS Significant legal developments in agricultural biotechnology in 2015 include the continued viability of the Vermont genetically modified organisms (GMO) food labeling law, set to go into effect June 1, 2016, and the Food and Drug Administration’s (FDA) approval of the AquaBounty genetically engineered salmon.

Vermont Act 120. Vermont’s Act 120 establishes mandatory labeling requirements for food products sold for human consumption that contain ingredients produced with genetic engineering. Act 120 also prohibits use of the word “natural” or any “words of similar import” on product labels or advertising of covered foods. Act 120 has been

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challenged in the U.S. District Court for the District of Vermont by the Grocery Manufacturers Association, Snack Food Association, International Dairy Foods Association and National Association of Manufacturers. The plaintiffs’ complaint alleged violations of the First, Fifth and Fourteenth Amendments to the U.S. Constitution, the Commerce Clause and Supremacy Clause of the U.S. Constitution, and the doctrine of preemption. Plaintiffs sought a preliminary injunction enjoining Vermont from implementing Act 120 until the litigation was resolved. On April 27, 2015, the court dismissed the motion for preliminary injunction on the basis that the plaintiffs had failed to demonstrate irreparable harm. Plaintiffs have appealed the denial of the motion for preliminary injunction to the Second Circuit Court of Appeals, and oral argument was heard on October 8, 2015.

Safe and Accurate Food Labeling Act of 2015. In a related development, the U.S. House of Representatives passed H.R. 1599, The Safe and Accurate Food Labeling Act of 2015, on April 23, 2015. The Act would preempt state GMO labeling laws and require that the Department of Agriculture establish a voluntary system that would govern non-GMO and GMO-free labeling. A companion bill has not been introduced in the U.S. Senate.

FDA GMO Determinations. On November 19, 2015, FDA determined that the genetically engineered AquAdvantage salmon produced by AquaBounty Technologies is as safe to eat and as nutritious as non-genetically engineered Atlantic salmon. FDA also determined that the AquaBounty containment system where the fish are grown make it “extremely unlikely” that the genetically engineered fish could escape and become established in the wild. However, the Consolidate Appropriations Act of 2016 mandates that FDA not allow introduction into interstate commerce of “any food that contains genetically engineered salmon” until FDA publishes labeling guidelines for such salmon.

CALIFORNIA REGULATORY DEVELOPMENTS Proposition 65. The Office of the Attorney General and the Office of Environmental Health Hazard Assessment (OEHHA) attempted several “reforms” of Proposition 65 during 2015. These reforms include proposed regulations on naturally occurring chemical levels in foods and new warning text regarding how regulated entities should assess chemical exposures under the regulations (including the meaning of the term “average”). Some of these reforms were intended to reverse judicial rulings favorable to defendants. This is ironic because for years OEHHA and the Attorney General’s office (informally) took the position that defendants should not simply seek regulatory relief from onerous Proposition 65 regulations but “make the law” by proceeding to trial. Now that defense victories have been secured, there is an effort to limit or even reverse some of the judicial rulings. Some of the proposed reforms also arose as a response to the ongoing private-citizen litigation against foods (particularly dietary supplements), and we anticipate continued litigation against food products.

Green Chemistry. After many years of delays, the California Environmental Protection Agency Department of Toxic Substances Control (CalEPA DTSC) made progress in implementing its Green Chemistry program (also called the Safer Consumer Products Regulation). DTSC identified three priority chemicals and products as follows:

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DTSC also has released a guidance document on how to perform an alternatives analysis, the lynchpin of how regulated persons are to assess the priority products and evaluate the so-called “safer alternative” chemicals. Comments from the business community have been critical, and the guidance remains a work in progress.

Climate Change Legislation. Various bills address financial issues associated with climate change. First, S.B. 185 requires the massive State Teachers’ Retirement System and the Public Employees’ Retirement System to cease making new investments in “thermal coal companies.” These are defined as entities that generate 50 percent or more of their revenues by mining thermal coal. Both retirement funds also must eventually divest holdings in thermal coal companies, with divestments completed by July 2017. S.B. 9 requires 10 percent of auction proceeds from California’s GHG trading regime to be expended on transportation projects. While existing legislation already compels such expenditures, S.B. 9 specifies that said funds go only toward “transformative” improvements that result in material reductions in vehicle miles traveled (a metric monitored in California). This may mean that such funds effectively can be used only for rail, bus, ferry and other mass transit projects. S.B. 101 allocates about $250 million in GHG auction proceeds to delineated projects, including about $60 million for mostly commercial water-efficiency programs, $70 million for weatherization projects in low-income communities and about $90 million to subsidize low-carbon vehicles in the form of consumer rebates. This last is an interesting choice of expenditure priorities, given the large sum involved when balanced against other legislative efforts to incentivize drivers away from personal vehicles. S.B. 208 allocates the huge sum of $810 million for expenditures on integrated regional water management plans aimed to enhance water security due to climate change.

California also is mandating more systematic collection and evaluation of methane emissions data (A.B. 1496). Additionally, the Integrated Climate Adaptation and Resiliency Program is created under S.B. 246. This authority is charged with coordinating and streamlining climate adaptation measures, many of which are being undertaken in a fragmented manner by a wide range of local agencies. Whether more standardization and harmonization will result (e.g., adjacent jurisdictions adopting compatible, not competing, adaptation strategies) will be monitored.

Hazardous Materials and Waste. Effective January 1, 2020, sales of microbead-containing personal care products used to cleanse or exfoliate will be banned in California. There is an exception for such products where the concentration of the microbeads is less than one part per million (A.B. 888). CalEPA DTSC also has extended the use of “alternative management standards” allowing disposal of “treated wood waste” in Class II or Class III landfills to December 31, 2020, thereby reducing costs and management standards for such wastes for an additional term (the prior sunset date was June 1, 2017) (S.B. 162). A similar effort to streamline waste management is embodied in S.B. 489, which authorizes DTSC to develop a “universal waste management plan” for photovoltaic modules that otherwise would constitute hazardous waste under state law. There are changes to California’s complex medical waste management regime in A.B. 225, which requires tracking (like hazardous waste) of certain biohazardous waste from generator to final disposal. There are new terms for pipeline inspections and safety updates in S.B. 295 and A.B. 1420.

Water. For the first time, due to the drought, users are required to report and monitor groundwater quantities. Surprising though it may be, the state did not have a consistent and complete database, nor means for collecting use and volume information, respecting California’s groundwater resources. This new logging requirement is causing confusion in some jurisdictions and in some cases complicating groundwater cleanup efforts, as additional reporting and monitoring information is necessary. A.B. 938, A.B. 617, S.B. 13 and other legislation regulate various aspects of groundwater extraction, sustainability, monitoring and use. A.B. 1390, which streamlines the adjudication process for groundwater basin entitlements, is a major uncertainty in many groundwater basins. Other drought-related legislation includes a state prohibition on local authorities’ enacting bans on synthetic grass, artificial turf or drought-tolerant landscaping (A.B. 1164). Most significantly, A.B. 92 adopts a series of statutory amendments to implement emergency drought legislation, including additional authorities to the Department of Fish and Wildlife regarding water diversions, pilot projects for residential

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customers to install water-efficient appliances or devices, and additional funds for small communities (some of which ran out of water) to secure more reliable drinking water supplies.

California Environmental Quality Act (CEQA). On November 30, 2015, the California Supreme Court issued its long-awaited opinion on the Newhall Ranch development, a 12,000-acre, residential, multiuse planned community project in northern Los Angeles County intended to house nearly 58,000 people among new stores, golf courses, schools and recreational centers. In Center for Biological Diversity v. California Department of Fish and Wildlife, the California Supreme Court ruled that a 5,828-page environmental impact report (EIR) prepared by the California Department of Fish and Wildlife for two natural resource plans related to the project was legally inadequate under CEQA.

The court’s 5-2 majority opinion sided with environmentalist opponents of the development on three major issues: GHG emissions, mitigation measures involving a protected species of fish (the threespine stickleback) and exhaustion of administrative remedies. The decision is the first in a series of anticipated opinions regarding CEQA’s requirements for GHG emissions analysis.

For developers, the most significant aspect of the court’s ruling came in its evaluation of the project’s GHG emissions — endorsing significance thresholds based on consistency with statewide GHG reduction goals in what is known as a “business as usual” model but nonetheless invalidating the EIR’s use of that threshold because it did not adequately explain the link between such statewide thresholds to local effects of the project. The court’s decision to strike down the environmental approvals on this ground may re-energize project opponents across the state to use GHG challenges as a leading weapon to attack real estate development approvals under CEQA.

EUROPEAN UNION ENVIRONMENTAL DEVELOPMENTS Medium Combustion Plant (MCP) Directive. MCPs increasingly contribute to air pollution due to the increase in the use of biomass as a fuel. Addressing the need for regulation of MCP emissions, the new EU Medium Combustion Plant Directive (MCP Directive) introduces limitations to the emissions of certain air pollutants (sulphur dioxide, nitrogen oxides and “dust”) by MCPs with a rated thermal input between 1 and 50 MW. With certain exceptions, all MCPs are covered by the MCP Directive, irrespective of the type of fuel they use.

The MCP Directive came into force on December 18, 2015. EU member states are required to transpose the MCP Directive into their national laws by December 19, 2017. New MCPs will be required to meet the stricter emission limits by December 20, 2018. Existing MCPs with a rated thermal input over 5 MW need to adhere to the emission limits beginning January 1, 2025, while the deadline for smaller MCPs is January 1, 2030.

In addition to setting emission limits, the MCP Directive requires permits and registrations for MCPs. Relevant national authorities will ensure the issuance of permits or the registration of new MCPs. The MCP Directive also imposes several monitoring obligations on MCP operators.

The MCP Directive provides for several exemptions and derogations. MCPs that operate less than 500 operating hours per year can be exempted from most emission limits except for requirements for dust. Specific MCPs may apply for additional derogations until January 1, 2030.

Energy Union Strategy. Marking the start of an overhaul of the entire EU energy market, the European Commission (the Commission) announced its “Framework strategy for a resilient Energy Union with a forward-looking climate change policy” on February 25, 2015. The strategy sets out the steps the Commission will take to establish an EU Energy Union.

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Measures will include legislation to redesign the electricity market, ensure more transparency in gas contracts, develop regional cooperation, ensure the supply of electricity and gas, and increase EU funding on energy efficiency and renewable energy. These and further legislative developments will affect many, if not all, businesses.

In the context of the framework strategy, the Commission went on to launch its “summer energy package” on July 15, 2015. The package contains the following:

• A legislative proposal to revise the EU Emissions Trading System (ETS). The Commission proposes an annual reduction of 2.2 percent in ETS allowances from 2021 onward compared with the current 1.74 percent. This amounts to an additional emissions reduction of 556 million tons over a decade (2021–30). In addition, a total of around 6.3 billion free ETS allowances will be freely allocated, focusing on sectors at the highest risk of seeing their production relocated outside the EU (carbon leakage).

• A legislative proposal for new regulation on energy efficiency labeling. This proposal seeks to restore the A-G scale for energy labeling, to establish a product database for energy efficiency and to introduce a safeguard measure to improve national market surveillance.

• A non-legislative communication on “Delivering a new deal for energy consumers.” This communication analyzes the obstacles that prevent consumers from making full use of the internal energy market.

• A non-legislative “Communication on New Market Design.” This aims at redesigning the European electricity market. The Commission plans to publish draft legislation on the new market design this year.

• The launch of a public consultation on a new energy market design.

EU Eco-Label Tests Challenge. In 2013, the vacuum-cleaner company Dyson launched an action for an annulment of the Commission Delegated Regulation on Energy Labeling of Vacuum Cleaners (supplementing Directive 2010/30). Dyson argued that the eco-label tests endorsed by the Commission misled consumers about the real energy performance of vacuum cleaners and were thus harmful for the environment.

On November 11, 2015, the EU General Court dismissed Dyson’s action in its entirety. The judgement is available here. According to the General Court, the test selected by the Commission was the most suitable to help consumers choose the most efficient products.

The General Court’s decision came in the context of the heightened attention to companies’ green tests in light of the Volkswagen investigation and amid Dyson’s allegations that its competitors were misinforming customers about the energy efficiency of their own products. The judgment demonstrates that EU Courts give the Commission a broad margin of discretion to decide which tests are reliable, accurate and reproducible.

Review of Environmental Measures Under Aarhus Convention. NGOs have the right to challenge the environmental administrative actions of EU institutions and environmental acts of general application. In particular, NGOs can request an internal review of environmental decisions taken by the Commission.

On January 13, 2015, the European Court of Justice (ECJ), the EU’s highest court, ruled that NGOs can ask for an internal review only if the act concerned is individual in scope, in accordance with the Aarhus Regulation. By doing so, the ECJ has set the limits within which NGOs can challenge environmental acts and administrative actions.

The ECJ explained that such reviews can be provided only in accordance with the Aarhus Regulation, which allows NGOs to ask for an internal review only if the act concerned is individual in scope. The NGOs had argued that they were entitled to challenge the environmental acts of EU institutions solely on the basis of Article 9(3) of

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the Aarhus Convention, an agreement designed to provide individuals and environmental groups broad access to justice in environmental matters. The EU applied the provisions of the Aarhus Convention to EU institutions by adopting the Aarhus Regulation in 2006.

In this ruling, the ECJ overturned decisions of the lower General Court in two joined cases: Joined Cases C 404/12 P and C 405/12 P, Stichting Natuur en Milieu (available here) and Joined Cases C-401/12 P to C-403/12 P Vereniging Milieudefensie et Stichting Stop Luchtverontreiniging Utrecht (available here). In its ruling, the ECJ called the General Court’s finding that NGOs could rely directly on Article 9(3) of the Aarhus Convention “an error of law.”

The ECJ found that the Aarhus Convention lacks the clarity and precision needed for direct application. Article 9(3), the ECJ held, does not contain any unconditional and sufficiently precise obligation capable of directly regulating the legal position of individuals and therefore does not meet the conditions of clarity and precision. Direct application requires a regulation applying the Aarhus Convention at the national (including EU) level, and because the rights provided for in Article 9(3) may be exercised only by members of the public who meet criteria laid out in national law, that provision is subject to the adoption of a subsequent measure at the national (including the EU) level.

“Article” Versus “Component” Ruling. On September 10, 2015, the ECJ adopted a landmark ruling resolving a dispute between the Commission and the European Chemicals Agency (ECHA), on one side, and several member states on the other regarding the concept of an “article” under the Regulation on Registration, Evaluation, Authorization and Restriction of Chemicals (REACH). The ECJ’s rejection of the Commission’s and ECHA’s broad interpretations of the concept of an “article” as applied to assembled products expands the heavy administrative burden that REACH imposes on industry.

In its ruling in Case C-106/14 (available here), the ECJ rejected the longstanding positions of the Commission and ECHA and found that components retain their character as “articles” after they are incorporated into an assembled product. The ECJ’s rejection of the Commission and ECHA positions has important implications for the reporting obligations of producers and importers under REACH Article 7(2) and suppliers under Article 33. Those obligations apply if an article contains a substance on the REACH “candidate list” of intrinsically hazardous substances (Annex XIV) that exceeds 0.1 percent of the article’s weight. Importers and suppliers of an assembled product — but not an EU producer of the assembled product — will now have to go through the cumbersome, difficult and potentially costly process of examining each component for candidate-list substances to determine whether they exceed the threshold for the reporting and information requirements.

The ECJ interpreted Article 33 as requiring that the information provided to customers must include, at a minimum, the name of the substance. According to the ECJ, that requirement cannot be regarded as imposing an excessive burden. Therefore, pursuant to the ECJ’s ruling, all suppliers in the supply chain of an assembled product must not only determine whether components in the product contain hazardous substances exceeding the 0.1 percent limit relative to the weight of the component but must also (at a minimum) determine the names of those substances, even if other information regarding their safe use is not available.

Approximately three months after the ECJ rendered its judgment, ECHA published a temporary (fast-track) update to its guidance on requirements for substances in articles to reflect the ruling (available here). ECHA has announced that a more comprehensive update will be issued this year.

Endocrine Disrupter Challenge. The Biocidal Products Regulation contains restrictions on the placing on the market and use of substances having endocrine-disrupting properties. On December 16, 2015, the General Court issued its ruling in a widely anticipated case brought by Sweden against the European Commission

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(available here). The General Court found that the Commission had breached its obligation under the Biocidal Products Regulation by failing to set criteria to identify endocrine-disrupting substances by December 13, 2013.

The regulation contains restrictions for substances considered endocrine disruptors. For example, Article 5 stipulates that substances having endocrine-disrupting properties, which “may cause adverse effects,” may not be approved for their respective use. Moreover, Article 19(4) requires that substances having endocrine-disrupting properties may not be approved for use by the general public (regardless of whether they “may cause adverse effects”).

Although provisions on endocrine disruptors are in force in some sectoral EU legislation, no formal criteria have yet been established, internationally or at the EU level, for identifying endocrine disruptors. Accordingly, the Plant Protection Products Regulation and subsequently the Biocidal Products Regulation required the Commission to specify scientific criteria for the determination of endocrine-disrupting properties by December 2013.

As the Commission failed to deliver criteria to identify endocrine-disrupting substances by the December 2013 deadline, Sweden took action against the Commission in July 2014. Sweden was supported by several intervening EU member states (Denmark, Finland, France and the Netherlands) as well as by the European Parliament and the EU Council.

In its ruling, the General Court noted that “[i]t is clear from this provision that there was a clear, precise and unconditional obligation for the Commission to adopt delegated acts specifying scientific criteria for determining endocrine disrupting properties, and that this should take place before December 13, 2013.”

Following the publication of the General Court’s ruling, the Commission indicated its intention to continue its work on an ongoing impact assessment, which would evaluate the effect of different options for the scientific hazard-based criteria and their implementation in the sector-specific legislation. The Commission estimates that this work will be completed during 2016, allowing the Commission to recommend and adopt criteria for identifying endocrine disruptors in 2017.

The Commission has two months to determine whether it wishes to appeal the General Court’s decision to the ECJ.

Substance Evaluation Process Under REACH. ECHA evaluates substances under REACH and requests information in substance evaluation cases. In an important case involving carbon tetrachloride, the ECHA Board of Appeal (BoA) annulled an ECHA decision on September 23, 2015 (available here). The BoA introduced a three-pronged test that ECHA must meet to justify its requests for information in substance evaluation cases, with potentially broad implications for industry.

Due to concerns for human health, carbon tetrachloride, an industrial and laboratory agent, has been included on the list of chemicals that have to undergo additional evaluation under REACH. As part of this evaluation, ECHA requested an additional one-generation reprotoxicity testing study to assess carbon tetrachloride’s reproductive properties. The study involved testing on vertebrate animals and imposed significant costs on the registrants of carbon tetrachloride.

The BoA found that ECHA’s decision to request the study infringed the principle of proportionality. According to the BoA, ECHA failed to justify its information requests in substance evaluations by demonstrating that there is a “potential risk” to human health or the environment; that the “potential risk” identified needs to be clarified; and that the information requested has “a realistic possibility of leading to improved risk management measures.”

The BoA opinion is particular noteworthy as other registrants may rely on the ruling to assess the validity of ECHA’s requests for information in other substance-evaluation cases.

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If you have any questions regarding this Sidley Update, please contact the Sidley lawyer with whom you usually work, or

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